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Why labelling your investments is a good idea

Separating investments into different buckets with different products will help in ensuring you keep a check on how close you are to achieving your goal as the time of need comes closer.

People shouldn’t have labels but investments need them. It is said that the colour of money is the same no matter what you use it for. It means that money is essentially fungible, you can use the same Rs 500 to buy chocolates or clothes or a mutual fund SIP. 

Similarly, if all your goals are long term in nature you can just invest everything in equity and keep withdrawing as required. However, a big pool of equity investments to cater for 3-4 different goals can get muddled. What if you end up withdrawing more than required for goal A, thereby compromising goal B?

Bucket it out

While the choice of the asset for investing may be the same for more than one goal, what you can do to distinguish one investment from the other is choose separate products for each goal. Let’s say you want to plan for your child’s higher education expense coming up in 10 years and at the same time you want to start saving for retirement. 

Both these financial objectives can be addressed by investing in equity mutual funds for a long period. There are two aspects here, firstly with the education goal, the amount required can be more specific whereas for retirement your goal may be to create as large a kitty as possible. 

To keep it simple, let’s say you don’t have any other long-term goal. You may choose to then allocate all your surplus to equity mutual funds since that product can help achieve both. The second issue is that you have one goal that is clear about the investment horizon whereas the other is vague. 

So, when the time comes to fulfil the education goal and let’s say there is an option for your child where the cost is more than you estimated, then you will not hesitate to withdraw as your equity investments will show sufficient amount.

But in reality, you are withdrawing additional amounts from your retirement kitty. Also, because your retirement timeline is not clearly earmarked, you may even end up stretching that timeline more than you want to. 

This is hardly planning, it’s an ad hoc approach to your investments for specific goals. 

Long term goal planning can be vague, but try to fit in as many specifics. For example, retirement planning might mean including a purchase of a house. This itself is a big expense and worth separating into a separate goal. 

Also, if your retirement goal is still further away, then the choice of products or the type of equity mutual funds can be slightly varied too. 

Things to keep in mind

Calculate the amount required for the goal based on future inflated value rather than what it costs now. 

Try not to allocate just one fund for each goal. Keep at least 2-3 for the sake of diversification; you are investing for a long period and changes in scheme attributes or fund managers can occur or simply performance consistency can change over time. Don’t duplicate these schemes for other goals. 

Long term goal planning can be vague, but try to fit in as many specifics. For example, retirement planning might mean including a purchase of a house. This itself is a big expense and worth separating into a separate goal. 

Takeaway

Articulating your goals, the amount required and the timeline to achieve it will help you earmark the precise saving requirement today. Separating the investments into different buckets with different products will then help in ensuring you keep a check on how close you are to achieving your goal as the time of need comes closer. This will also ensure that you don’t eat into other goals to fulfil the ones that come up earlier than the rest.

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