Is making specific investments for specific goals a good approach?

Written by Suresh Sadagopan

There are generally two approaches followed while investing, to meet goals. Some prefer to invest specifically & separately, for each goal, which we call the goal tagging approach. There is a psychological advantage to this approach.

Suppose one has invested in some schemes for child’s marriage, it may not be disturbed even in a situation where one desperately needs money. Hence, this works to the investors’ advantage.

But investing separately for each goal also increases the number of schemes that one needs to invest in. While reviewing the portfolio, one needs to review each portfolio tagged for a particular goal and make appropriate changes, as per the mandate for that portfolio. One will also need to invest as per the priority assigned to a goal. The work involved due to all this is certainly more.

For instance, to achieve a high priority goal, one has to invest in debt-oriented investments for the most part, for short term goals. For medium to long term goals, the amount invested in debt-based instruments in the portfolio, can come down and equity portion can go up.

Also, if the portfolio in question is underperforming, it will not be able to meet that goal. What usually happens is that there is a propensity to go aggressive on the portfolio just so that the goal is achieved. This is not a good approach, except in case of stretch goals (which are more of a wish) where one is willing to take the chance to make it possible.

The other reason why a target amount needed for the goal may not be achieved is the change in life situations. In case of unexpected expenses, job losses etc. the regular savings assumed to be done in the run up to the goal, may not be possible.

In case of a shortfall for a goal, money needs to be brought in from some other pool. In most cases that pool is a fund kept for some other goal, typically retirement. This happens a lot. Such drawings from another pool beats the objective of a goal tagging approach to investments.

In the pool of funds approach, the money needed for the various short-term goals (typically till three years) are held in safe & steady investments, which will preserve the value of those assets.

In the pool of funds approach, we consider the entire wealth of the client and invest that as per the risk profile, return expectations, liquidity, tenure needs, tax efficiency etc. The goals that are important are decided & included in this overall provisioning. In this approach, the nearer term goals are always provided for. Hence, the other portions of the portfolio can be managed without undue pressure.

The asset allocation is done at the overall portfolio level. Due to this the portfolio is compact & is very manageable. While the psychological advantage of a scheme tagged for an important goal is not there, one is also not under pressure to make a certain portfolio perform & reach the targeted amount.

This pool of funds approach can also better accommodate the changing life circumstances & any new goals coming in as the overall portfolio can very easily be reconfigured to the extent needed.

In the goal tagging approach, specific locked in products are bought many times to hard code the goal alignment ( children’s education MF / Insurance plans, retirement products, children’s marriage endowment plans etc. ). This limits possibility of realigning as per the changing life requirements.

Hence a pool of funds approach is preferred for its flexibility, ease of alignment to the client’s overall asset allocation needs, ease of management due to the compact portfolio size, ability to accommodate the changing life needs etc.