Most investors accumulate investments from their savings in their financial journey without any specific goal or aim. Over time, these investments become a big money pot, with no precise tagging or correlation to their financial goals. Result? Despite making decent saving and investing efforts, the family is confused w.r.t. their preparedness concerning their financial goals. Having a clearly segregated portfolio for each financial goal can solve this problem. Today, we look at some top reasons why you should create a separate portfolio for each financial goal and how it can help you organise your financial life.
#1: Gives a proper direction to your savings and investment plan:
Most of the time, you may have invested for the sake of meeting your tax-saving targets or helping your relative or friend meet their sales targets. In such cases, there is no real planning involved in deciding on how much money you need, when you need it and so on. When you create separate portfolios for different goals, you get a clearer sense of direction as to where your monthly savings are going. It also gives you a sense of satisfaction and motivation that each rupee of your savings is really working towards meeting your critical financial goals. It brings a complete shift in your investment approach whereby you switch from being returns-oriented to being goal-oriented.
#2: Helps you resist the temptation to splurge away your savings:
The strategy of having separate portfolios for each financial goal is a useful psychological trick. Since your lakshya (goal) is clearly in front of you, you become more focused on meeting it. Once you have earmarked your savings towards a particular financial goal, you are less likely to withdraw that money for impulsive purchases. There is a certain seriousness that now comes in your financial planning efforts. And it starts paying off in time in terms of an increase in savings and reduction in instances of wasteful spending. If you do not care to tag your investments to specific financial goals, the guilt barrier does not kick in. As a result, you can end up in a lot of wasteful spending and heartache.
#3: Helps you choose the right investment products:
Each financial goal is different and requires a different kind of planning. You cannot have one size fits all approach. Similarly, you have dozens of investment options, each governed by a different risk and return matrix. Your aim in financial planning is to make the right match between the financial goal and the investment products. Suppose you do not have a segregated goal-wise portfolio. In that case, it becomes tough to assess whether the investment product is suited to the goal. For example, suppose you have a goal of accumulating a down payment for a home loan in the next 3 years. In that case, you need to have a separate portfolio consisting of fixed-income investments like fixed deposits and liquid mutual funds. Suppose you have one big money pot with a very high component of equity shares, and the market tanks big time right when it’s time to go for a home loan. In such a situation, things can get really tricky. In this situation, a better option could be to have a dedicated low-risk portfolio, which you can track and monitor for sufficiency over time.
#4: Select the proper asset allocation for the financial goal:
Asset allocation is a robust risk management tool in the hands of every investor. The first thing you need to do to implement asset allocation in your financial life is to decide on an ideal asset allocation. One of the critical factors for deciding on asset allocation is the time to goal. So, you cannot have the same ideal asset allocation for all your financial goals. For example, for a goal that is due to mature in the next 3 years, you will prefer 100% allocation in fixed income. The priority here is the safety of the portfolio and not the maximization of return. However, for a retirement goal that is 30 years away, you can allocate 60% in equity and 40% in debt. The idea here is to have a more significant allocation to equity and spend as much time in the market as possible to reap a decent return.
#5: Helps you de-risk your portfolio in time:
More important than saving for the goal is how smartly you start de-risking your portfolio as the goal’s due date comes near. You do this by gradually moving your equity investments into fixed income (ideally 3-4 years to the goal). This is with the intention that you are fully invested in fixed-income investments by the time the due date approaches. This precise action is possible only if you have created separate goal-wise portfolios. Else you will be completely lost on this front and get hurt badly if the markets tank just before the maturity of an important goal. Also, in such a case, if you cannot adjust or postpone the goal, your lack of timely action will negatively impact your planning for other goals.
#6: Helps you track your goal achievement easily:
Creating separate portfolios for each goal helps you precisely calculate the exact percentage of how much goal has been achieved at any point in time. This helps you get a sense of where you are in terms of your financial planning and keeps you motivated to save and invest more. In difficult times, tracking the goal can also help you make mid-course corrections by postponing or reducing the outlay of the goal, as needed.
Creating separate portfolios for each financial goal can give you much-needed clarity and tracking ability concerning your financial goals. It also helps you to be focussed and motivated towards your financial goals. However, you should supplement this activity with regular tracking and monitoring your portfolio and goal achievement targets.
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