As geopolitical tensions are rising globally, financial planners recommend their clients to build a Core and Satellite portfolio using mutual fund schemes to optimise their long-term returns and meet their financial goals.

Let us understand Core and Satellite Portfolio in the accumulation stage

Core Portfolio using MF schemes:

The core portfolio is built based on the investor’s objectives—age, risk-taking capacity, and the time available (Time Horizon of investments) to reach their financial goals. It is called long term asset mix as well as strategic asset allocation

Investors can have a mix of low cost index funds and diversified large-cap-oriented equity funds that aim to provide stability and help achieve long-term goals. Large-cap stocks have proven track records and strong management teams with the ability to manage difficult domestic or global situations. To build the core equity portfolio, investors can use a mix of large cap schemes/Funds and Index funds. They can also invest in Flexi cap and Multi cap funds with proven track record and consistent returns as desired by investors.

Satellite Portfolio using MF schemes:
The satellite portfolio also called Tactical Asset allocation can be made based on relatively aggressive schemes /funds such as small-cap funds, momentum funds, value funds, or narrow Sectoral funds like defence, infrastructure, banking, IT, and pharma. These carry a higher risk but have the potential to generate higher alpha.

Core vs Satellite- How much to be in each strategy?

Based on an investor’s risk profile and timeframe for goals, financial planners believe investors can allocate a large amount 70–75% to their core portfolio, and the balance 25–30% to the satellite portion. While the core portfolio can remain stable and would not require high churning or frequent changes, the satellite portion may require investors to time the market to enter and exit at right time to generate maximum returns. Such schemes could carry higher risk and volatility

Now, it’s well known that equity has the best return potential, and if you are in the accumulation phase, it has a crucial role in your portfolio.

This does not mean that debt funds or hybrid funds can’t be core funds. A debt fund can be a core fund in a retiree’s portfolio. And if someone is looking for automatic asset allocation, even a hybrid fund can be a core fund.

The core funds take care of the returns and the stability, and the satellite funds help boost the overall returns or help diversify better

Dean Madhu Shina

• Investment in equity – You’d be aware of the fact that equity markets offer you high rate of return. But they also tend to be extremely volatile, and if you lack technical knowledge to choose the right stocks you are likely to suffer losses. Mutual funds are the safest and easiest ways to leverage the equity market without going into the nitty-gritty of stocks trading.
• Diversification of investments –Investors need to diversify their capital allocation in the equity market. In pure equity mutual funds or those where equity is the major component your investments is spread across different stocks that cuts down your risks as compared to trading in a single stock. Depending on your choice you can opt for sectoral mutual funds or funds that invest in companies by their size.
• Beyond equity – Mutual fund investment isn’t just about investing in equity funds. You have safer options such as liquid funds, debt funds or those that invest your capital in the money market or income instruments. By choosing different types of funds you will be able to meet your short and long terms investment goals.
• Professional management – This is perhaps the biggest benefit of investing in mutual funds. You don’t need to keep track of the market as is the case with investing in the equity market and make daily buying and selling decisions. A professional fund manager would do this for you. All that you need to do is invest your capital when the markets are conducive and divest part of your investments when you can book substantial profit.
• Slow and steady investment – SIP or systematic investment plans have become the most preferred route of investment into mutual funds. Here you invest into various funds in small installments thus spreading your risks. What this does is reduces the entry barrier in investing and lets your grow your wealth exponentially over time. To share an example a monthly investment of ₹500 per month for 30 years in equity mutual funds or ₹1.8 lakhs in total can turn into ₹33.2 lakhs considering 15% annual return which is standard average for such long term investments.