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Diversification is a crucial aspect of investment. It helps you to increase the risk-adjusted returns of a portfolio. There are different methods to diversify your portfolio depending on your goals and risk tolerance. One such method is the core and satellite portfolio strategy.
In this blog, we'll explore this strategy in detail to help you determine if it is the right choice for you.
A core and satellite portfolio are an investment strategy that divides your portfolio into two parts: the core portfolio and the satellite portfolio. It aims to strike a balance between stability and growth by combining passively managed and actively managed funds.
The core portfolio is the base of your investment strategy that provides stability and long-term growth potential. It consists of diversified, low-cost passive investments, like ETFs, index funds, stocks, bonds, etc., that generate consistent returns over the long term.
Core investments are typically passively managed and have lower expense ratios and transactional costs. Moreover, their diversified nature helps reduce the impact of a bad-performing security on the overall portfolio.
The satellite portfolio consists of targeted high-risk investments with the potential to generate high returns. It aims to capitalize on market opportunities and improve the overall portfolio performance. These investments focus on specific securities, sectors, or themes expected to outperform the market—for example, individual stocks or sector-specific ETFs or funds.
Contrary to the core portfolio, satellite investments are more volatile and actively managed. They give investors greater flexibility to adjust to changing market dynamics and enhance their risk-adjusted returns.
Depending on your goals and risk appetite—low, moderate, or high- you can allocate different core and satellite investments to your portfolio. Here's how:
Risk-averse or conservative investors prioritize stability and capital preservation over aggressive growth. Hence, they must focus on these factors while creating a core and satellite portfolio.
Core portfolio: Conservative investors should focus on low-risk assets with stability and income generation potential—for example, bond funds, index funds, or ETFs.
Satellite portfolio: This part of the portfolio must be focused on conservative investments with high growth potential—for example, low-volatile equity funds, dividend-paying stocks, etc. The idea is to maximize returns while lowering the risk.
These investors are medium risk-takers. They accept a moderate level of risk for higher returns. Hence, their core and satellite allocations can be slightly riskier than conservative investors.
Core portfolio: The core portfolio can consist of both stocks and bonds for stability and growth. This can include balanced funds, diversified index funds, or a mix of both equity and bond funds.
Satellite portfolio: Moderate risk-takers can invest in slightly high-risk securities. This includes sector-specific funds or growth-oriented individual stocks that are actively managed and have a solid track record.
These are high-risk-takers willing to accept a high level of risk for potentially higher returns. Hence, they are more aggressive when creating a core and satellite portfolio.
Core portfolio: It should provide some stability but focus on more growth-oriented assets—for example, a higher allocation of equity funds, international funds, or growth-oriented index funds.
Satellite portfolio: These investments should focus on opportunities with high-risk, high-reward potential. This includes sector-specific funds in emerging industries, individual stocks with high growth potential or assets expected to generate outsized returns, like venture capital funds.
The core holdings invest in securities across asset classes, lowering the impact of individual investments on the overall portfolio. You can further mitigate risk and enhance portfolio performance by including satellite investments focused on specific high-potential securities.
While your core holdings provide stability and steady growth, satellite investments allow you to capitalize on emerging market trends and securities with the potential to outperform market returns. Together, they help you build a solid portfolio with high-performance potential.
Satellite investments have the potential to generate higher returns. However, they also come with a higher risk. Core investments help mitigate this risk due to their diversified and low-cost nature. They act as a buffer, ensuring your portfolio isn't overexposed to volatility. This enables you to spread risk effectively while seeking growth opportunities.
The core and satellite portfolio is one of the strategies for investors who are looking to capitalize on emerging growth opportunities while maintaining some stability and capital preservation. However, when building your core and satellite portfolio, you must consider other critical factors such as investment goals, risk appetite, and the time horizon to make informed investment decisions.
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Policies, Codes & Other Documents