Objectives and portfolios

Suresh Krishnamurthy

THE Children's Gift Fund launched by HDFC Mutual Fund is not the first of its kind.

But it underlines the need to create separate portfolios for particular objectives, such as building a house, saving for education and marriages and saving for retirement, that may require different asset allocation patterns.

Moreover, the time-frame for achieving these objectives will vary considerably. Separate portfolios that cater to these specifications may be quite useful in that context.

The creation of a combined portfolio to achieve these objectives may not lead to optimal results. For example, suppose one needs funds for investing in a house two years down the line and the combined portfolio has a significant exposure to equities. There is, then, the risk that in the event of a downturn in equities the investor may have to draw down on funds invested in debt funds to build his house. This may actually mean that funds earmarked for other objectives have been used. More important, this may alter the asset allocation portfolio for other objectives adversely.

While this may be so, a special mutual fund vehicle such as a Children Gift Fund does not also appear to be the answer. A standardised mutual fund product for each objective may prove to be too rigid. For example, an asset allocation pattern of 40 per cent in equities may be appropriate for a pension fund investor whose age is less than 35.

However, for a person beyond 55 a similar asset allocation pattern may be inappropriate. While standardisation may have its benefits it suffers from the limitation that the features may not at all serve the interest of each of its investors.

A better approach for investors would be to create a portfolio on their own in a manner that is consistent with each such investment objective, instead of relying on standardised products.

For example, an investor who would need funds for building his house two years hence cannot take the risks of investing in equities and necessarily has to park all the funds in a debt scheme. Similarly, constructed portfolios to cater to each such important objective appears to be an option that investors need to explore seriously.