Are core and satellite mutual fund portfolio strategies suitable for you?

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Investors must combine all the right parameters to choose the ideal mutual fund scheme. This includes consistent mutual fund returns, superior past performance, a steady fund manager, and a low expense ratio.  Equally, a proper strategy for a portfolio model is also required to bring more returns for this scheme to deliver a good return. Let’s understand two portfolio strategies: core and satellite investing styles in mutual funds.

Understanding core and satellite portfolio strategy:

The core portfolio strategy includes low-cost, passively managed large-cap funds, index funds, and exchange-traded funds (ETFs). As the name rightly suggests, a core portfolio forms the center of an investment portfolio to generate higher returns with low risk over the long term. On the other hand, a satellite portfolio strategy includes actively managed funds like sectoral funds, and international funds, that aim to generate alpha returns in your portfolio.

How does this portfolio work?

Investors divide their portfolios into two segments: core and satellite. The core portfolio is constructed keeping in mind long-term objectives like retirement and education of children. It accounts for around 70%–80% of the portfolio. This portfolio comprises indexes, ETFs, diversified equity, and large-cap mutual funds.

The satellite portfolio is a minor component of the overall portfolio usually 30-20% and is handled tactically to capitalise on economic and market situations. Examples include long-term gilt funds, sector-specific funds, and international funds.

The core portfolio provides stability and potential returns for long-term growth. Meanwhile, the satellite portfolio provides an additional risk-adjusted return, which helps boost total returns. Below is an example of a particular portfolio that comprises an 80:20 Core-Satellite mix The core portfolio includes funds such as large-cap ETF (10%), large-cap funds(20%), midcap active funds(20%), Ultra short-term debt funds(10%), as well as EPF and bank deposits (20%) can also be part of it.

On the other hand, international funds (5%), stocks (5%), and long-term gilt funds (10%) can be part of a satellite portfolio.

Which is useful for the investors? 

One of the significant benefits of the core investing of a portfolio is that it keeps investor expenses at the minimum, as it includes index funds & ETFs.

While tiny variances in expense ratios may appear insignificant on the surface, they can accumulate to have a significant influence over time. One might see that index funds being part of the core investing have the lowest expense ratios, and it benefits them over the long term. Similarly, the satellite portfolio allows investors to tilt their portfolios to take advantage of the prevailing market conditions and get more returns.

According to the experts, investors should consider their recommended asset allocation and financial goals while following a portfolio strategy. However, having both a core and a satellite mutual fund portfolio strategy can be beneficial for investors who understand their risk profile.

“It’s essential for an investor to have both core and satellite strategies to balance the need for long-term and tactical short-term investments. Also, MF schemes are constructed with a fairly long-term approach, stock churning is minimal, and the approach of fund managers is more aligned to long-term compounding rather than focussing on quick short-term strategies,” Mohit Gang, co-founder/CEO, of Moneyfront.

Conclusion:

Both have their purpose or objectives. The idea is to aim to get returns beyond the broader portfolio. If investors do well only with a core portfolio, then satellite can still be considered optional.

It is important to align the portfolio with one’s goals and liquidity requirements. While investors may consider core and satellite approaches, sticking to the overall risk profile should always be kept in mind.