How to invest in mutual funds if we have multiple goals?

Published: May 30, 2021 at 10:26 am

Last Updated on February 12, 2022 at 6:13 pm

In a Q and A session held on our Youtube channel yesterday (linked below), we encountered two similar questions: Kohila asks, “we have two goals, retirement, our son’s education which is 8 years and 12 years away. Should we use the same mutual funds for both or separate funds?”

Bala Gurunathan asks, ” I have an X goal in 5 years and a Y goal in 8 years. And next to that usual goal like everyone have child studies, marriage and retirement. I am 35 now. I should maintain asset allocation for each goal or one asset allocation overall?”

So the essential question is, if I have multiple goals, how should I use mutual funds? Should I use the same funds for all goals? Or should I have separate funds for each goal?

The asset allocation for an 8Y goal is different from that of a 12Y goal. That is, the amount of risk we can take for each is different. Suppose you choose to hold 50% equity for the 12Y goal. You cannot hold more than 20-30% equity for the 8Y goal.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

More importantly, consider the situation 5Y after we start investing. The 8Y goal will now reduce to a 3Y goal and the 12Y goal to a 7Y goal. The 3Y goal should have no equity in the portfolio, and the 7Y goal, not more than 20-25%. Does it make sense to combine the two goals in the same portfolio and same asset allocation? I would never do it. Also, one of these goals is retirement which can (under certain circumstances) be planned with enough equity in the withdrawal phase.

The same argument applies to combining 5Y, 8Y goals with much longer-term goals. So as a thumbrule, one should not combine short-term or medium-term goals with long-term goals.

How about two long-term goals? LIke retirement after 20Y and child’s education after 17Y? Yes, both goals could have the same initial asset allocation. Say 50% equity and 50% debt.  After 10-12Y, we will have to start gradual withdrawals for the child’s education.

These withdrawals should ideally not affect the other goal, and they should be factored in from day one else we might end up investing less for both goals. This is a screenshot from the freefincal robo advisory template that offers both independent and unified portfolio planning options with scheduled withdrawals (curved arrows).

Independent portfolio vs unified portfolio approaches
Independent portfolio vs unified portfolio approaches

There are additional considerations as well. One of the most enticing aspects of a unified portfolio is not its superficial simplicity but the investment required. The unified portfolio approach assumes that once one goal is completed, more money would be available for investment. This is why the initial investment is lower than the independent portfolio approach.

This is okay if we cannot invest the total amount necessary if all goals are treated independently. It gives us some hope. However, if we can invest a higher amount but do not because of the unified portfolio calculation, it can be risky as we depend on future cash flows.

Index funds can be used for both approaches. In particular, active funds used in the unified portfolio can be messy. If they underperform and you want to switch, the tax outgo can be high. Some people stick to poor funds or clutter their portfolios with additional funds fearing tax.

In summary, while using the same portfolio for all financial goal is in principle ‘ok’, they must all be long-term goals. Either approach will work, but a portfolio de-risking plan is essential for both. In our opinion, it is easier for the typical DIY investor to do this with the independent portfolio approach.

There is no great benefit in having fewer funds if we do not plan the systematic withdrawals ahead.  We recommend DIY investors use the independent portfolio approach. This makes tracking and management easier. It also forces them to invest more – if not immediately, at least in the future.

Simplicity in portfolio management should be measured by how well we have planned ahead and not by the number of funds held or what kinds of funds they are.

The Q &A is available in the comments section of this video.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)