Want to use the same mutual funds for all your financial goals? Here is how to do it

Published: December 8, 2018 at 11:12 am

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“Should I use the same mutual funds for all my goals, or should I have separate funds?” is a question that investors often ask. The answer you can either go with the same funds for all goals or have separate portfolios. I discuss how to use the same funds for all financial goals. What are the advantages and disadvantages? This post is a suggestion by Jayant Rana.

If you choose to manage all financial goals with the same funds, then you will have fewer products to manage but you need to be careful in tracking. If you choose separate funds for separate products then you will have more products to track but tracking itself is simpler, so is the risk management. I have discussed these issues at length before along with a calculator: Financial Goal Planning with a Unified Portfolio

The above calculator was improved in the Freefincal Robo Advisory Software Template. So if you are already using the same funds or plan to do so, then use the robo template to figure out how much you need to invest in the portfolio.

Before we begin, Sudheer M from Bangalore joins as the 12th SEBI registered fee-only advisor in my list of planners. His website is prasidhi You can consider working on your money management with Sudheer.

How do separate portfolios for separate goals work?

It is quite simple. You plan for them independently, you invest independently, you track and rebalance independently. The big problem is that the total investment required for all the goals (call this Y)  could be quite high.

Want to use the same mutual funds for all your financial goals? Here is how to do it

How does a unified portfolio work?

You have a single portfolio with products for equity and fixed income. You invest a sum X in the portfolio (say 60% of X in equity and 40% in fixed income). Retirement is usually assumed as the last goal. Whenever the time comes for goals before retirement (e.g. child’s marriage, education), you pull out the necessary amount from the portfolio.

Finally, when you are ready to retire, the portfolio after all redemptions should be enough for financial independence in retirement. With these inputs, the X to be invested is determined. The big advantage with a unified portfolio is that X will typically be lower than Y. That is you need to invest less.

The reason for this is, once our children finish college or are married, we will have a bit more money to invest for later goals like retirement and this is factored in right from the start. Of course, this is dangerous to do so, but it gives people some hope!

How to use the same products for all financial goals?

  1. Decide the goals that have to be clubbed together. Do not mix short-term goals and long-term goals. That is a 5Y old should not be mixed with a 15Y goal as the risk necessary for both are very different. Combine only goals that are 10Y away
  2.  The robo template will give you an asset allocation for the unified portfolio.
  3. There two ways to operate from this point.

Method 1:

  1. Stick to the asset allocation as specified in the robo template and rebalance once a year.  The equity allocation will gradually reduce.
  2. Five years before your goals (that occur earlier than retirement) start pulling out money from both equity and fixed income and put it in say, a liquid fund and let it remain there until you use it.
  3. This method is simpler and requires no special tracking other than the unified portfolio. The problem is that the equity allocation will be a bit high for a goal that occurs prior to retirement. This can be risky.

Method 2:

  1. Use the robo template and find out the investment amount needed for each goal separately, add them up and invest in a unified portfolio with say 60% equity and 40% fixed income.
  2. Although the portfolio is the same, track each goal separately For example if you invest Rs. 10,000 for 3 goals, then you know from step one, 40% of then is for goal 1, 20% is for goal 2 and so on.
  3. Track the investments and investment value for each goal as if they are done separately. You can do this at Value Research.
  4. Once you start investing, stick to the yearly asset allocation suggested by the robo template and rebalance according. For an example, see: Do we need to time the market?
  5. A  few years before the goal deadline, you can gradually pull out money for each goal (most of which will be in fixed income)

The key difference between method 1 and 2 is: When you start pulling out money for each goal, most the corpus will be in equity if you follow method 1 and in fixed income if you follow method 2. Which is why I recommend 2.

Yet another way to track is to use this Google spreadsheet portfolio tracker for stocks and mutual funds. Here you can assign percentages to each goal. That is, say 40% of the corpus is for goal 1 etc. This is simpler. That is it! The rules of the game are pretty much the same. Let me know if you have questions.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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