DT Personal Finance: Should you invest for multiple goals separately or together?

CHENNAI: As most youngsters start settling down in life, the realisation dawns that there are multiple goals that require saving. Purchasing a house, children’s future (education), retirement are a few common goals that most people in their 30s will have.

So, should you invest separately for each goal or have just one common portfolio for all?

It is advisable to follow a goal-based approach and invest separately. If you have too many goals, then a few of the similar ones can be clubbed. I firmly believe maintaining separate portfolios for different goals is invariably a better strategy. It is more straightforward and better aligns with an individual’s mental framework.

So distinct goal targets allows for a transparent understanding of the progress being made towards each goal individually. Let’s take an example to better understand this. Suppose you (age: 37 years) have 3 main goals – i) House Downpayment (in next 2-3 years), ii) Son’s higher education (in about 7-8 years), and finally iii) Saving for retirement (in about 20+ years). So, the three goals are different as they have different investment horizons. House downpayment is a short-term goal. Son’s higher education is a medium-term goal. And retirement is a long-term goal. It is prudent to adopt different strategies with separate allocations

For example:

House Downpayment (2-3 years) needs to have a higher debt allocation

Son’s higher education (7-8 years) needs to have a balanced allocation between equity and debt

Retirement (20+ years) required a higher allocation to equity given the long-term nature and the need to beat inflation sufficiently over the next two decades.

Now if you keep separate portfolios for each of the above goals, then it will help you greatly in managing the asset allocation for each goal individually in a proper and goal-appropriate manner.

When you take this goal-based approach, then at any given point in time, you would know exactly how much money you have accumulated for each goal and properly visualise goal progress.

Alternatively, if you had taken a common portfolio approach, where all goals are handled using one portfolio, it would have been exponentially difficult to comprehend how much progress each goal has made. Also, in a common portfolio approach, you would have to take one common asset allocation. This has to be a proper and well-calculated mix of individual goals’ own asset allocations.

Another issue with the common-portfolio approach is that if you see a large amount of money lying in a common goal pool, you may be tempted to spend more for a near term goal (or even a non-critical discretionary expense) than what you ideally would want to.

But if you have too many goals that you need to invest for, then it may not be prudent to tackle each of them individually. A better approach would be to club a few goals (with similar goal timelines and risk requirements) and then invest towards them. I would also suggest keeping the goal of retirement separate from all other goal buckets.

And what about the number of funds this approach will need?

You can either have different funds for different goals. For portfolio simplicity, you can even create different folios within the same fund/scheme to segregate for different goals. So that is why investing separately for key goals is better than putting everything in one common pool. In my view, this approach is far more effective and helps the investor be in much better control of the finances at goal level.