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Should the same funds and folios be chosen for different goals?

Posted on 14 Jun 2021
Author: Sayan Sircar

Tags: Portfolio Construction

3 mins read

Investors are often in a dilemma as to the best way of structuring their portfolio for different goals.

Should the same funds and folios be chosen for different goals?

Some common questions among investors getting started with investing in multiple goals are:

Should I be using different funds for different goals?
If the same funds are used, should different folios be used to segregate among goals?
If identical funds are used for different goals, should they be spread among different AMCs?

For example, which is “better”?

Goals G1 and G2, Fund E and D for both goals where E is an equity fund and D is a debt fund with different folios for each goal
Goals G1 and G2, Fund X and Y for G1, Funds A and B for G2 where both X and A are equity funds and Y and B are debt funds
Goal G2 with debt fund D and equity funds E1 and E2 from different AMCs, where E1 and E2 belong to the same category e.g. Nifty 50 index funds
and more variations

The answer to these is a mix of taxation, usability, behavioural aspects and AMC risk. We will deal with each of these separately.

The simplest or “minimalist” portfolio contains the same funds, folios and AMCs for all goals. The allocations can be kept separate using Excel or a similar tool. However, this approach may not always work in all instances. Ultimately there is no right or wrong answer to this and investors should do what works for them after considering the factors below.

📚 Topics covered:

Taxation during rebalancing
Usability, mental accounting and building spreadsheets
Behavioural aspects
Operational/market risks and AMC diversification

Taxation during rebalancing

Offsetting trades

The minimalist portfolio, by design, will minimise the number of transactions, both buys and sells, due to the netting effect across various goals. This leads to lower capital gains taxes to be paid (see figures in red dotted box above where equity and debt rebalancing changes from year-to-year)

Higher the number of funds and folios, there will be lower chances of having offsetting trades and hence more taxes due to selling.

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Usability, mental accounting and building spreadsheets

Investors sometimes prefer some goals to be given higher priority. For example, children’s education goal may be considered untouchable in case of an emergency and a physical separation via different AMC’s funds may be needed to maintain that distinction from other goals.

Alternatively, seeing the balances in different folios in a dashboard, with each folio tagged with different goals, may be easier to visualize progress. A large monolithic figure may be difficult to interpret.

Many users will not have the necessary Excel or dashboarding skills to separate the goals and will benefit from separated folios and funds.

Behavioural aspects

Investors can be better off looking at a big-picture view of their portfolios if they look at it frequently.

If the investors habitually look at market levels and portfolio values regularly, then constantly changing values of funds and folios may trigger unexpected emotional responses.

This leads to unnecessary actions being taken: sudden buy/sell, exiting falling markets or acting without following their rebalancing plans.

Operational/market risks and AMC diversification

AMC diversification is needed due to actions beyond the investor’s control. Two classic examples are

Closure of 6 debt funds by Franklin Templeton in 2020 (Website)
Blockage of redemption in a folio due to an incorrect pledge of units (Article)

Investing in similar funds across AMCs can somewhat mitigate risks like these though this increases the effort needed in tracking many funds and portfolios as discussed here: Do you need multiple mutual funds to keep your money safe?.

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Topics you will like:

Asset Allocation (19) Basics (8) Behaviour (10) Budgeting (10) Calculator (14) Case Study (3) Children (11) Choosing Investments (31) FAQ (4) FIRE (11) Gold (6) Health Insurance (4) House Purchase (14) Insurance (14) International Investing (8) Life Stages (2) Loans (9) Market Movements (10) Mutual Funds (22) NPS (5) NRI (5) News (6) Pension (6) Portfolio Construction (42) Portfolio Review (24) Real Estate (4) Retirement (33) Review (11) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (9) Tax (19)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
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