Many of us invest without evaluating the purpose behind each investment. The singular objective seems to be to try and make the money grow as much as possible. All the accumulated mutual funds, stocks, fixed deposits, Provident Fund and small savings schemes are treated as one big money pot from which to withdraw as and when the need arises to fund a goal. This arbitrary, haphazard approach to investments can put your goals in jeopardy. The solution lies in having a separate portfolio for each goal.
How does it help?
The basic idea behind creating a separate portfolio for each goal is to provide a sense of direction to your investments. Since the end use is defined, you know why and where every rupee is flowing into. You are less likely to shirk your savings responsibilities if you know how it will hurt a particular goal.
Says Tanwir Alam, Founder and MD, Fincart, “When you commit to paying an EMI on your housing loan, you tend not to withdraw this amount for any other purpose. Similarly, if you know a certain portion of your savings is intended for your child’s education, you will not compromise on the same.”
In the absence of a goal-based investing discipline, one runs the risk of overdrawing funds for the nearest goal, leaving much less for goals still to come. For instance, if you withdraw too much for your child’s marriage, the critical retirement goal could take a hit.
However, if you link each goal to a separate portfolio, you know exactly how much money you have at your disposal towards each goal. To make up for any shortfall, you may have to resort to drawing from investments intended towards another goal.
Even so, you would know exactly how much additional savings you need to make towards getting the latter goal back on track. Also, as a goal draws near, having a dedicated portfolio will allow you to shift the money to safer investment avenues to protect the already accumulated wealth from a sudden market downturn.
Having separate portfolios also means lower chances of over- or under-deploying funds towards a particular goal. Since you have clearly outlined how much you need to invest towards each goal, this ensures you are not investing too little for a particular goal while over-compensating another. Most importantly, having a goal-based structure enables you to keep track of progress. At regular intervals, you can check how much stands accumulated against each goal.
You can then determine whether you are on the right trajectory or if there is likely to be a shortfall in the targeted corpus. If so, you will be in position to take corrective steps like weeding out bad investments from the related portfolio or enhancing the contribution towards the goal. Besides, this exercise also acts as a strong motivational tool, insists Alam. “It is like putting yourself on a weight-loss programme. Knowing where you stand towards meeting critical targets motivates you to keep at it.”
Having a system in place also prevents you from reacting adversely to changes in market conditions. You will continue setting aside funds irrespective of market conditions, without falling prey to the emotions that often cloud sound decision making.
Hemant Rustagi, CEO, Wiseinvest Advisors, agrees, “When investments are linked to goals, it makes you a focused investor. One is mentally prepared to deal with volatility so that abrupt decisions based on prevailing market conditions can be controlled.”
However, there are some who think that having a single portfolio for all goals is more appropriate for the layperson. Suresh Sadagopan, Founder, Ladder 7 Financial Services, says, “I do agree that having multiple portfolios for every goal works well from the individual’s psychological perspective. But it is far more complicated to manage such a portfolio.”
Creating a structure
While it sounds too tedious to put in practise, it is not a difficult exercise insist planners. The first step is to articulate the key financial goals, identify appropriate time horizon in which to meet them and ascribe a monetary value to each of them. Here, you take into account the current value of the goal, as if you were to incur the cost today itself.
Today’s value of the goal is then adjusted for inflation to arrive at the target value of the goal many years later. “It is important that investors consider the erosive impact inflation has on wealth. Failure to do so could lead to a huge shortfall when your goal is due,” says Rustagi.
Once you figure out the target corpus required, you can ascertain the amount required to be invested to reach that value, assuming a reasonable rate of return on the investment portfolio. Here, the SIP route in mutual funds is recommended to build the corpus steadily over time. There are many free tools available online that can help you arrive at a precise investment amount for every goal. You should also prioritise the goals in order of importance and proximity. Goals which carry higher importance and shorter timeline should take precedence.
Depending on the time horizon and your own risk profile, you determine the best asset mix for each portfolio. Longer term goals are best met through higher allocation towards equities while shorter term goals should be apportioned higher debt investments.
The final step of the puzzle is to figure out the right investments within each asset class. Keep the portfolio compact and do not invest across too many schemes. If you are sceptical of doing this on your own, a financial planner can help. Follow the plan diligently, and you would certainly be better off for it.
