Implementing the Unified Portfolio Approach in the Wealth Accumulation Phase

Published: August 20, 2023 at 6:00 am

Last Updated on August 20, 2023 at 10:01 am

In this article, SEBI-registered flat fee-only financial advisor Swapnil Kendhe discusses how we can implement a unified portfolio approach for all our long-term goals.

About the author: Swapnil is a SEBI Registered Investment Advisor and is one of the sought-after advisors on the freefincal fee-only financial planners’ list. You can learn more about him and his service via his website, VivektaruHis story: Becoming a competent & capable financial advisor: My journey so far.

As a regular contributor here, he is a familiar name to regular readers. His approach to risk and returns are similar to mine, and I love the fact that he continually pushes himself  to become better, as you see from his articles:

Editor’s Note: The freefincal robo advisory tool allows you to plan using the unified portfolio approach or the independent portfolio approaches (different portfolios for each long term goal). Now over to Swapnil.


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When I got my RIA registration in 2017 and began working as a financial planner, I started with the individual goal portfolio approach, where you run individual portfolios for individual goals. Little did I know how different life situations, financial situations, financial goals/aspirations, financial products, assets, and personalities my clients would have.

Some clients would come to me with 35 mutual fund schemes in the portfolio, a few others would have all their net worth in real estate. Some clients would be comfortably financially free, or their saving potential would be significantly higher than the savings required to achieve their financial goals. Some others wouldn’t have half the saving potential required to fund all their financial goals.

I would do a lot of intellectual gymnastics to allocate different products to different goals. In six months, some clients couldn’t tell which product was allocated to which goal. It would become even more complicated when products would change in the portfolio. I wouldn’t know how to review some of my client’s portfolios. It was challenging to apply the individual goal portfolio approach in every case.

I needed an approach that could accommodate differences and changes in life situation, financial situation, income, savings potential, risk tolerance and thereby asset allocation, taxation, financial products, and understanding of money management of my clients.

So I began thinking, why not treat all the assets as a single portfolio and manage the liquidity and the overall asset allocation of the portfolio? We must create or maintain enough liquidity in non-volatile financial products to care for our financial needs over the next 4 to 5 years. We can treat the remaining assets as a unified portfolio and manage them at the asset allocation level—no need to run individual portfolios for individual goals.

Here is how it can be done

(I have used the back-of-the-envelope calculations in this article. In back-of-the-envelope calculations, we assume that the rate of inflation and rate of return are the same. Inflation and return cancel each other out. Therefore, we can do all calculations in present value and without inflation or return assumption. Please check Try these back-of-the-envelope financial planning calculations!

Say the following are Mr Vivek’s short-term goals with his best guess of the amount required in present value:

Emergency Fund                      – 10 Lac

Car Purchase after 2 years       – 10 Lac

Vivek needs 20 Lac liquidity in the portfolio for these goals. He can have all the 20 Lac parked in a combination of Cash, FD, Debt/Arbitrage Funds. No need to keep the emergency fund parked separately in a separate product or use a different product or folio for the car purchase goal.

There could be two scenarios. He could have less liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) than required for these goals, or he could have more liquidity than required.

Scenario 1 – Less liquidity in the portfolio than required for short-term goals

If Vivek has 15 Lac liquidity in the portfolio, he can calculate the monthly savings required to create the required liquidity by using back-of-the-envelope calculations.

Amount required in present value for short-term needs – a20,00,000
Available liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) – b15,00,000
Gap – c (a-b)5,00,000
Months till the farthest goal – d24
Approx. monthly savings to be allocated in present value – c/d21,000

Vivek can allocate 21,000 from his monthly savings to create the required liquidity in the portfolio, and invest the balance monthly savings towards long-term goals.

He can decide the allocation of the balance monthly savings between equity and debt based on the current asset allocation in his unified long-term portfolio against the target allocation. If his target equity:debt allocation in the long-term portfolio is 60:40 but current equity:debt allocation is 30:70, he can invest all his balance monthly savings in equity until equity allocation in the long-term portfolio reaches the target. Once equity allocation is at the target, he can invest 60% of the balance monthly savings in equity and 40% in debt. EPF, Scheme C & G of NPS Tier 1 takes care of a part of the debt allocation for salaried people.

If equity allocation in Vivek’s long-term portfolio is 70% against the target allocation of 60%, he can put 40% or 50% of the balance monthly savings in equity to push equity allocation in the long-term portfolio towards target allocation.

Scenario 2 – More liquidity in the portfolio than required for short-term goals

If Vivek has 30 Lac liquidity in the portfolio, the excess liquidity of 10 Lac becomes part of his long-term portfolio.

Amount required in present value for short-term needs – a20,00,000
Available liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) – b30,00,000
Excess Liquidity – (b-a)10,00,000

Vivek can deploy the excess liquidity of 10 Lac and balance monthly savings in such a way that the asset allocation in the unified long-term portfolio moves towards the target allocation.

If equity allocation in Vivek’s long-term portfolio is lower than the target allocation, he can invest a part or all of excess liquidity lumpsum in equity. If he is not comfortable investing lumpsum in equity, he can maintain this liquidity in his long-term portfolio. Some liquidity should ideally be maintained in the long-term portfolio to take advantage of cheaper equity valuations during market corrections.

Vivek’s target allocation in the unified long-term portfolio would primarily depend on his years to retirement and risk tolerance. As he approaches retirement, he can slowly reduce the equity allocation in his unified long-term portfolio.

There are no medium-term goals in this approach. Any goal beyond 5 years is part of the unified long-term portfolio. We start creating liquidity for it after it becomes a short-term goal.

Withdrawals for bigger goals like Higher Education & Marriage Kids

At some stage, some of Vivek’s bigger long-term goals, like his kid’s higher education, would become short-term goals. He can start creating liquidity for these goals 4 or 5 years in advance. Suppose the following are his short-term goals in present value closer to his kid’s higher education.

Emergency Fund                             – 10 Lac

-Higher Education Kid after 5 years   –  30 Lac

Amount required in present value for short-term needs – a40,00,000
Available liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) – b20,00,000
Gap – c (a-b)20,00,000
Months till the farthest goal – d60
Approx. monthly savings in present value to be allocated – c/d33,000

Vivek can start allocating 33,000 from his monthly savings to create the required liquidity in the portfolio. He can invest the balance monthly savings in the unified long-term portfolio.

He needs to calculate the amount to be allocated to create liquidity for short-term goals every year. Inflation and changes in goal amounts change this number every year. Never forget that financial planning is a series of small course corrections.

It is possible that Vivek needed 30 Lac for higher education but he could accumulate only 20 Lac. In this case, he can take out the balance 10 Lac from his long-term portfolio.

From which asset class he takes out the balance 10 Lac would depend on the asset allocation in his long-term portfolio against the target allocation. Suppose equity has given very good returns in the recent past, and the equity allocation in his long-term portfolio is higher than the target, Vivek can take out the balance 10 Lac from equity. If equity markets are depressed, and the equity allocation in his long-term portfolio is lower than the target equity allocation, he can take out the balance 10 Lac from the debt part of his long-term portfolio. Or he can take out this amount from both equity and debt in such a way that the unified long-term portfolio allocation stays closer to the target allocation.

By the time of goals like kids’ higher education and marriage, liquidity is available even in debt products like PPF and SSY. One can also take out money from EPF and NPS for higher education and marriage of kids if required.

If you think carefully, starting to create liquidity in the portfolio for goals like higher education and marriage 4-5 years in advance is no different from tapering equity allocation as we move closer to goals in the individual goal portfolio approach.

I have many clients whose income is big enough to finance goals like higher education from their annual income. There is no need for them to touch their unified long-term portfolio.

This approach offers a lot more freedom. If an investor wants to have 10% Gold in his portfolio, he can do that. If an investor is scared of equity, we can adjust equity allocation for his comfort. We can run higher equity allocation for someone more aggressive. Real estate, excluding primary residence, can also be part of the unified long-term portfolio. This approach can easily accommodate changes in income, products, asset allocation, and even the investment philosophy.

If an investor can save and invest more than the amount required to achieve all his financial goals, he can keep creating/maintaining liquidity required for short-term needs and invest all his surplus savings in the unified long-term portfolio. If savings potential for an investor is less than the savings required to achieve his goals, he would still try to create the liquidity required for short-term needs and invest the surplus savings, if any, in the long-term unified portfolio as per his target allocation. In the latter case, one needs to calculate the affordability to spend on bigger goals.

Calculating affordability to spend on bigger goals

With all our assumptions, calculations, and projections, what we really have are our existing assets and a monthly/annual surplus for investments. The amount we can spend on a goal depends on our income, savings potential, and the corpus we manage to accumulate.

We can use heuristics like the 3/20/30/40 rule for buying a house (3 times CTC, max 20 year loan, max 30% of take-home pay as EMI, and about 40% down payment for buying), or 5 times monthly income as car purchase affordability, etc. But heuristics are not perfect rules. You have to use them in a particular context.

We can use back-of-the-envelope calculations to find our affordability to spend on any goal. The annual savings potential, including the EPF, NPS, superannuation, ESPP, RSUs and bonus should be equal or higher than the amount required to achieve all the financial goals. If it isn’t, we must put in conscious effort to increase savings and/or bring down the amount we want to spend on a goal until savings potential matches the savings required.

Suppose in the first year of graduation, Vivek’s kid tells him that he wants to go abroad for post-graduation. Amount required is 75 Lac in the present value. Vivek is 50 years old now. He can work till 55 in his profession. He anticipates that his annual expenses in retirement in present value would be 8 Lac. His current assets excluding primary residence and personal use gold are 3 crore. His annual savings potential is 15 Lac.

Let us see if he can afford to spend 75 lac on the post-graduation of his kid using back-of-the-envelope-calculations.

Retirement Corpus Calculation
Retirement age55
Years in retirement (life expectancy 90 Years – retirement age 55 Years) – a35
Annual Expense in present value – b₹8,00,000
Corpus required in present value – a*b₹2,80,00,000

 

Amount required in present value for all financial goals
Emergency Fund₹10,00,000
Graduation fee for remaining 3 years₹15,00,000
Post-Graduation₹75,00,000
Retirement₹2,80,00,000
Marriage – Kid₹10,00,000
Total amount required in present value – a₹3,90,00,000
Existing Assets excluding primary residence & personal use gold – b₹3,00,00,000
Gap – c (a-b)₹90,00,000
Years to retirement – d (retirement age 55 – current age 50)5
Annual savings required in present value c/d₹18,00,000
Annual savings potential₹15,00,000

Since Vivek’s annual savings potential is less than the annual savings required, he cannot afford to spend 75 Lac on the post-graduation of his kid. But if we reduce the post-graduation expense amount to 60 Lac, the annual savings required becomes equal to Vivek’s annual savings potential. This means Vivek can afford to spend 60 Lac on the post-graduation of his kid.

Often, investors want to spend more money on goals like a kid’s higher education than the financial planning calculations above allow them to spend. But they must understand that there are no free lunches in life. If Vivek spends more than 60 Lac on post-graduation, he would have a lower retirement corpus, thereby reducing the lifestyle he can have in retirement, or his retirement would be postponed by a year or two. Expense is a control variable. Ideally, You should spend on any goal what you can afford, not what you want to spend.

If I were Vivek, I would ask my kid to go for the education loan or enter into a loan arrangement with me for the entire post-graduation expense, or at least for the amount in excess of the calculated affordability. My kid shall return the amount back after he starts earning. Graduation is a parent’s responsibility, not post-graduation. How much you spend on post-graduation or marriage of kids depends on the size of your corpus. These goals also come closer to retirement, so one must be extra careful.

I will write about the Unified portfolio approach post-retirement in a separate article.

Editor’s Note: The freefincal robo advisory tool allows you to plan using the unified portfolio approach or the independent portfolio approaches (different portfolios for each long term goal).

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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, 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.
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