Satellite investing

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They take away from the time and research that's often needed to pick good individual stocks. Funds allow for one purchase to cover multiple investments, because a mutual fund will hold a variety of related stocks. It's potentially a win-win. You can get many investments without looking into individual companies, which gives you instant diversification.

You will also see lower commission costs, because your portfolio will have lower turnover, which means fewer purchases. You can have even lower costs if you decide to invest in index funds. Their management fees tend to be much less than those for funds that are actively traded. Large-cap funds make good core positions, because these are often larger companies that have shown that they can thrive through economic downturns.

They tend to increase their value over time. There can be price volatility, like with any stock, but they provide the best stability and consistency if your focus is on the long term. Your Satellite Holdings Your satellites represent fund categories that will complete the core-and-satellite structure. These other funds can include mid-cap stocks, small-cap stocks, foreign stocks, fixed-income bonds, sector funds , gold, and money market funds.

It also can help you achieve reasonable returns for reasonable risk. Key Takeaways The core-and-satellite strategy involves having a single mutual fund that makes up the largest single holding in your portfolio. Satellite funds are smaller funds that are meant to complement your core mutual fund. Following a core-and-satellite strategy gives you automatic diversification. Composition of core and satellite portfolio For different investors, the core and satellite portfolio composition may differ.

For example: For some investors, the core portfolio may comprise index funds, and the satellite portfolio may include active funds. For some investors, the core portfolio may comprise large-cap funds, and the satellite portfolio may include mid and small-cap funds. For some investors, the core portfolio may comprise diversified active funds based on market capitalisation a large, mid, and small-cap fund.

The satellite portfolio may include sectoral, thematic, international, and smart-beta funds. Why should you follow the core and satellite investment portfolio approach? However, the outperformance of certain sectors, themes, etc. Such a deviation may not be in the investors' best interests and financial goals. This is where the core and satellite portfolio approach can come to the rescue of the investor. The approach helps the investor to have the best of both worlds. The investor can follow a disciplined approach and asset allocation with the core portfolio.

With the satellite portfolio, the investor can allocate some money to sectors, themes, etc. While the core portfolio will continue to be unaffected, the satellite portfolio can be churned as per market opportunities. An investor can transfer excess profits from the satellite portfolio to the core portfolio.

However, the investor should not do the other way round, i. As long as the satellite portfolio allocation is below a specified limit, its underperformance will not impact the achievement of long-term financial goals. How to construct a core and satellite portfolio approach based on the risk profile An investor following this approach may decide the allocation toward core and satellite portfolios based on their risk profile. They may follow a two-step strategy: Decide the broad asset allocation towards different asset classes such as equity funds, debt funds, gold , etc.

The equity allocation may then be split between the core and satellite portfolio. Should you follow the core and satellite portfolio approach? As an investor, if you do get tempted to deviate from your asset allocation to chase market opportunities, you should adopt the core and satellite portfolio approach.

The core portfolio allows you to follow your asset allocation without deviating from it. At the same time, the satellite portfolio allows you to allocate some money to other market opportunities and benefit from them. In short, the core and satellite portfolio approach allows you to have the best of both worlds, so you may consider following it. Investing in mutual funds with the Glide Invest App In this article, we learned about the core and satellite investment portfolio approach, how they work, and whether they are a good idea.