I recommend the Core and Satellite Portfolio Investment Planning approach to my clients who have achieved their financial goals and still have a decent amount of time to invest more.
In this recent Run up of the Equity Markets, some of my clients have achieved all of their goals. This was not due to the high returns but because of the discipline and perseverance, they have shown in the last 10 years. They have accumulated enough in No and Low return environments, which helped them participate with a big corpus when the Bull Market comes up. Their efforts and patience paid well. (Also Read: How to prepare yourself for a stock market fall?)
The best part is, almost all have 10 years of earning and saving life still in front of them. So, now we have moved towards the Core and satellite approach. Here we will keep the Corpus accumulated towards the goal as Core by staying invested in Moderate allocation as the purpose is preservation rather than growth.
And, for the new surplus being generated we may take chances, and have high-risk exposure (of course in the limits), and try to generate better returns. This would be the Satellite portion of the Investment.
The Investment products selected and even the strategy would be different in both.
This is one way of applying the Core and Satellite Portfolio approach. Core takes care of the main Requirements and Satellite pushes the return.
It can be applied in different profiles as per personal choices. But like every investment strategy, once applied it should be followed well. One should not lose focus and shuffle between strategies in different market scenarios.
Core and Satellite Portfolio – Different Investment Strategies
- Cost Focused
When the focus is on cost then the Core part of the portfolio can be Composed of Passive funds or ETFs; and Satellite can be Active funds, Direct Stocks.
Depending on the risk profile of the Investor, one may have exposure to PMS and AIFs too, after a proper understanding of the products. (Also Read: What are Alternative Investment Funds (AIFs)?)
Passive funds / Index Funds come with a Low-cost structure, and active funds charge higher, with an intention to generate higher returns than Index. (Read: Index funds in India – How attractive is Passive Investing?)
- Goal Focused
When Goals are in mind, then the core portfolio can be designed to take care of those goals and as and when you have a surplus as I did in my client’s case, you may invest them to generate high returns.
Satellite does not guarantee high returns, but at least you will find many investments that do not fit into the strategic asset allocation model. Like Sector and Thematic funds – Auto, Pharma, Rural India, Infrastructure, ESG, etc. (Also Read: What is so unique about the ESG Investment theme?)
There are many International Flavours that also can be considered depending on the market scenario like World Agriculture, World Mining, World Gold, Consumer-centric, US IT, Climate Change, Water etc.
However, you may also design core and satellite portfolios in the Core itself which is the Goal-oriented corpus.
- Risk Focused
When the concern is to manage the risk and volatility in the portfolio, then a Diversified and well-allocated portfolio having a decent mix of Equity and debt as per the risk profile of the Investor can become the Core portfolio.
As far as equity funds are concerned, you may go with Only Large Caps and in debt high-quality corporate bonds and government securities funds.
Concentrated portfolios having volatile strategies may be part of the satellite portfolio. Mid caps, Small caps, Credit risk funds can be part of this segment.
Nowadays you may find many concentrated strategies of Mutual funds, especially in smart beta and index space having the potential to generate high returns, of course with High risk. These are Momentum 30, Alpha Value 30, Small Cap 50 Index, FANG+ETF, S&P 500 Top 50. (Read: How good is Smart Beta Investment Strategy?)
What ratio of allocation should go in for Core and Satellite portions?
You may see in all the three strategies I have shared above, the satellite portion’s focus is on the Returns only. Be it Active funds or Concentrated funds, all have only one goal to beat the index. So you may like to have a mix of Active, Sector/Thematic, and Concentrated portfolios. (Also Read: How to decide an ideal Asset Allocation mix?)
But do not overdo it to make the portfolio complicated and unmanageable. Remember there has to be a reason for every investment you are making. (Also Read: How should a perfect investment portfolio look like?)
You need to decide on your core needs and then decide on the allocation. Of course, the major portion of your investment portfolio should go into Core. Say 75-80% of total investments.
As Core reflects your true need and support risk appetite, and thus anything that happens to this corpus may impact your whole financial standing. It may not be acceptable to you. So, you have to manage the core wisely.
Core and satellite portfolio approaches should better be used in the accumulation stage, and that too for long-term goals. If used properly with a Financial Planning structure, this investment strategy has the potential to generate better returns at a low cost.
Since there is a dearth of lower-cost funds in India and fintech has completely disrupted the space, with investors confused between price and value, any strategy without focus will not result in anything worthwhile. (Also Read: Why do Average Investor get below Average Market Returns?)
So, if Core Portfolio & Satellite Portfolio strategy is followed, one should have clear reasoning, understanding, and discipline to stay for long to get better results.