Mutual funds: When curating a new portfolio, investors are advised to follow the strategy of constituting two different sets of portfolios: core and satellite. This investing strategy can go a long way in long-term wealth creation and is also seen as a fulcrum of asset allocation.
Young investors are often urged to follow this strategy as a safe and secure way to build wealth over a period of time.
What is a core-and-satellite portfolio?
Core portfolio is the basis of an investor’s financial assets, offering stability, long-term growth, and lower risk. It typically comprises diversified and low-cost investments such as index funds, ETFs, or blue-chip stocks that track benchmark indices such as Nifty50.
The goal is to provide consistent returns with minimal volatility, forming the bulk of the portfolio (often 60-80% of total assets).
In contrast, the satellite portfolio is the speculative, higher-risk portion of the portfolio, which seeks higher returns or capitalises on specific opportunities. It includes investments such as individual stocks and sector-specific funds.
Elements of asset allocation
Pallav Bagaria, Director at Sapient Finserv, explains that at the time of building a portfolio, the first principle to emphasise is asset allocation. Core portfolio is the anchor that keeps your wealth steady, while the satellite is the sail that helps you catch the wind of opportunities.
“The core should be stable, diversified, and long-term in nature, built through asset allocation across equities, debt, and other suitable asset classes. The satellite portion, on the other hand, is where investors can take well-thought-out positions in themes or sectors that are currently showing promise. In today’s market, areas like consumption, IT, and autos are seeing strong traction, but these exposures should be tactical, limited in size, and reviewed regularly,” he says.
(Above categories are only indicative)
Experts also argue that investors should invest in large-cap funds and index funds as part of their core portfolio, whereas risky investments ideally comprise a satellite portfolio, which includes mid and small-cap stocks and funds.
“While investing in equity mutual funds, you should consider building the portfolio under a core and satellite approach. In this pattern, a larger proportion of money should be invested in the large and Flexicap fund. At the same time, a small portion could be invested in good-quality mid- and small-cap stocks as a satellite portfolio,” says Preeti Zende, founder of Apna Dhan Financial Services.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.
For all personal finance updates, visit here