You can tailor your portfolio to meet your life goals. For instance, if you want to accumulate wealth to meet your son’s or daughter’s college education, you can create an education portfolio for a specific time horizon with assets that will help you meet your goal.

But even in such a goal-based investment framework, there are certain investments that you can transfer from one time horizon to another. In this article, we discuss such investments and their associated benefits.

Equity holdings
Crossover investments are those that you can use for two life goals, when one goal sequentially follows the other.

Consider your retirement portfolio. You create this during your working life to accumulate wealth to sustain your post-retirement lifestyle. Your retirement income portfolio, on the other hand, is one from which you will draw money every month to sustain your post-retirement living.

So, your retirement portfolio is an accumulation portfolio while your retirement income portfolio will be a withdrawal portfolio. Yet, your equity investments can be carried over from your retirement to retirement income portfolio.

Of course, not all equity holdings in your retirement portfolio can ‘crossover’ to your retirement income portfolio.

Why? Your equity investment in your retirement portfolio may be in active funds which carry two kinds of risk — market risk and active risk. Market risk is the risk that the fund will decline in value because of a broad based sell-off. Active risk is the risk that the fund you chose will underperform its benchmark index.

As you approach retirement, you should reduce the risk in your retirement portfolio. This means reducing your equity allocation as well as your active risk.

You can reduce your active risk by switching from active funds to index funds as the latter carry only market risk.

So, index funds can ‘crossover’ from your retirement to retirement income portfolio.

Emergency fund
That is not all. Your emergency fund also carries a crossover investment.

This is a fund that contains two kinds of assets — money in savings account to provide immediate liquidity and investments in bank fixed deposits.

The bank FDs that you have during your working years can ‘crossover’ to your emergency fund that you have to provide for your retirement.

As an emergency fund has no fixed time horizon, you can typically create your deposit for a term that fetches high interest rate with no premature withdrawal penalty.

There is a clear advantage in crossover investments. The more you hold, the less time you need to create or even rebalance the portfolio that is earmarked for the next sequential goal. You can have crossover investments even between sequential goals during your working life.

But that would be possible only if you have more-than-required investments in the previous goal that you can transfer to the next goal.

For instance, your equity investments meant for down payment of the house could have generated more-than-required returns.

So, you can transfer some of the equity investments to your child’s education fund account.

As this happens during your working years, active funds also qualify as crossover investments. It is thus clear that equity funds typically qualify as crossover investments, bonds don’t.

B. Venkatesh
This article was published on August 23, 2015, in BusinessLine (The Hindu)