I have a very basic question on constructing investment portfolios for future goals. Most people have multiple goals spread out over different timeframes, e.g. short-term such as house purchase, marriage, holiday, etc (3-5 years), medium-term like child education (10 years) and long-term (15+ years) for child marriage, higher education, and retirement. My question is that does one need to have separate portfolios with separate mix of debt and equity for each individual goal? Assuming that equity would form a greater chunk of most portfolios, should one have separate mutual fund accounts for each goal to make redemptions easier?
One should have separate portfolios for different financial goals as the nature of each financial goal is different. Each goal needs a different amount of money and will need to be liquidated at different times.
If an investor creates a single portfolio of all his money, then it will be difficult for him to differentiate between the time horizon and risk level akin to each goal. It is important for an investor to match each goal’s risk and time frame with the instruments that would suit a particular goal’s requirement. Money that is needed within the next five to seven years must be in debt funds while money that is going to be needed after that can mostly be in equity funds. Very long-term money, something that you are absolutely certain will not be needed for more than ten years, should be in equity funds. So it is necessary to have different portfolios for different goals. The asset allocation must also be different for each financial goal rather than deciding it on the investor’s age and risk appetite as a whole.
Regarding maintaining of different mutual fund accounts, it is noteworthy that there is a limited fund selection that has done well in the past and is expected to deliver in the future also. Monitoring and review is another important aspect. So it is better to have a single account for all the portfolios that you have for each goal as there would be less paperwork involved. And your investments would be more tax efficient if you hold them in a single account as investments held for the long-term are tax friendly.