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Are all long-term goals the same and require the same investment approach?

Just because two goals are long term doesn’t mean the approach to them will be exactly the same. Let’s see how.

Just because two goals are long term, doesn’t mean the approach to them will be exactly the same. Let’s see how.

Let’s say you just had a baby. Being a proactive parent, you are planning for her higher education expenses. This would be an example of a long-term life goal that will become a major financial goal. 

You also have your retirement corpus to consider for which you know you will need at least 25X your annual expenses. You have 15 years plus for both goals. This makes both financial goals long term in absolute terms even if one comes a bit earlier than the other. 

Logic dictates that both the goals will need equity as an asset class if you are to beat inflation. But when it comes to the actual execution in terms of selecting the right mutual funds, things might not necessarily be the same.

It’s in the details

There is more to goals than just time frames or money. Specifics matter, such as relative importance of the financial goals, whether you will need the money at once or in instalments, back up plans, how much and how long can you invest for, etc. 

These might not really change the asset class, but they do influence the sub asset classes and in turn the kind of tools you would use. Let’s go back to the two long term financial goals – your retirement and your daughter’s education.

Priority and time available change things

Your daughter’s education is a critical goal, but retirement can’t be subservient to that goal because, your retirement can only be provided for by your investments. 

Considering this, you will have to allocate something for your retirement first (provided your emergency fund worth at least four months of your salary is in place). 

Non-negotiable doesn’t mean inflexible. Retirement will most likely come after your daughter’s college education starts. 

Let’s assume you are 32 and your daughter is a month old. You might plan to retire when you are 60, but your daughter’s college education is likely to start when she is 17. So, your retirement goal is 28 years away, whereas the education fund goal is 17 years away, giving you 10 years less to save. 

While both goals will need equity, you may need to allocate a greater percentage of your savings for the education goal. The goal that is closer might need a greater chunk of your savings than the goal that is farther, especially when target amounts are substantial.

Less time, higher allocation

While both goals will need equity, you may need to allocate a greater percentage of your savings for the education goal. The goal that is closer might need a greater chunk of your savings than the goal that is farther, especially when target amounts are substantial.

The additional time available for your retirement goal should make up for the lower allocation to begin with.

Specifics change the sub-asset class

Within equity mutual funds, there are many relevant options such as large cap, mid cap, a mix of the two, and also international fund of funds which invest in foreign stock markets.

Each comes with a different kind of return, volatility, and potential risk. While large cap mutual funds or even index funds might arguably be less volatile within equity, a portfolio made up only of large cap funds might not be able to fully exploit the opportunities for growth that 20 plus years offer. 

Over really long timeframes, addition of diversified mutual funds, for example Large and mid-cap funds, could help an investor unlock potentially higher returns and help achieve a bigger corpus with a relatively lower SIP amount. 

Therefore, a large cap heavy portfolio, which may be relatively less volatile, might make more sense for your child’s education. Adding international funds, if you are planning to educate her abroad, can be a smart option as it helps you to benefit from the currency rate difference and a portion of your investments will grow in line with the economy of the country of your choice.

Longer timeframes, greater volatility 

A mix of diversified and large cap equity mutual funds might, make sense for retirement. But you need to tweak it a bit when it comes to goals that are slightly nearer and stick to lower volatility options within equity.

Therefore, a large cap heavy portfolio, which may be relatively less volatile, might make more sense for your child’s education. Adding international funds, if you are planning to educate her abroad, can be a smart option as it helps you to benefit from the currency rate difference and a portion of your investments will grow in line with the economy of the country of your choice.

The verdict

Even goals which fall under similar time frames, might need different investment approaches and different portfolios. While the larger asset class remains the same, there can be variations within them to suit the exact nature of your goal. Thus, a portfolio approach to goals is better suited to achieving them rather than just selecting one fund and basing everything on it.

The benefit of an aligned portfolio approach is that you know how much you need to begin with and the best way to reach your goal amount. 

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