Core and satellite portfolios: Investment strategy, benefits, dos and don'ts, and common mistakes explained

The Core and Satellite portfolio strategy is a dynamic and diversified investment strategy which combines stable, long-term investments (Core) with higher-risk, high-reward opportunities (Satellite).

The dual Core and Satellite portfolio approach provides investors with a balanced exposure across varied risk types.

What is a Core Portfolio?

A core portfolio is one that comprises your foundational, low-cost and passive investment options. This includes fixed deposits, public provident fund (PPF), national savings certificate (NSC), national pension scheme (NPS), equity-linked savings scheme (ELSS), index funds (Top 50 Sensex or Nifty), mutual funds, Exchange-Traded Funds (ETFs), or other safe haven options.

The core must provide your portfolio with cushion and stability through exposure to varied asset classes. It is recommended by ICICI Bank, Angel One and Tata Capital that this comprises at least 60% of all your investment.

“The goal of the core portfolio is steady returns, lower risk, and wealth preservation over time,” according to the Tata Capital website.

What is a Satellite Portfolio?

This is a more hands-on, actively managed aspect of your portfolio that can be tailored. It could comprise of sector specific funds, alternative investments, individual stocks, REITs, commodities and cryptocurrency. This is a more targeted and high-risk strategy that focuses on higher returns.

Leading investment professionals including Angel One, ICICI Bank and Tata Capital advise that this not exceed 40% of your total investments.

What is the benefit of a Core and Satellite Portfolio strategy?

• It allows for diversification, where the Core portfolio acts as a safety net and “powerful risk mitigation tool” against sector specific impact or market volatility.
• It balances the cost and returns ratio by ensuring that you have a larger allocation in tools that provide low-cost and steady returns, while the smaller allocation is more flexible to change and can capitalise on opportunities.

• It also allows you to keep your portfolio liquid to some degree, rather than having it 100% tied to safer but longer-term options. This adaptability ensures your portfolio is “responsive to evolving market trends, without disrupting your core holdings”, ICICI Bank noted.
• You can also personalise and design your portfolio for your own unique financial goals and requirements. It also allows you room to experiment with your bets and tailor your investments according to your risk appetite.
• The flexibility also means that your investment strategy can change and evolve based on your age, income, targets and current financial goals.

Dos for Core-Satellite portfolios

• Do take stock of your long-term objectives and allocate accordingly.
• Do identify sectors you are comfortable with or view opportunity in for satellite investments.

• Do determine your risk appetite and set your allocation ratios accordingly.
• Do regularly review and rebalance your Core and Satellite portfolios based on your objectives and actual yield.
• Angel One and Tata Capital suggest a balance of 60-80% in Core portfolio and 20-40% in Satellite portfolio, with a review of the latter at least once a year.

Common mistakes to avoid with Core-Satellite portfolio strategy

Angel One noted that some common mistakes by investors include overloading the Satellite portfolio with too many high-risk investments, ignoring portfolio reviews, making changes too frequently, not diversifying and lack of discipline.

“If you're just starting out, focus on building a solid core portfolio first and then gradually add satellite investments as you gain experience,” it added.

The website also noted that while cryptocurrencies can be included in a satellite portfolio, they come with a high volatility and regulatory risks. Thus, if you want, invest only a small percentage based on your risk tolerance and investment goals.

Avoid rushing in allocations for your Satellite portfolio. Start small and you can increase the size or risk over time.

Not only during market hits, also review your portfolio when there are major life changes, such as higher education, marriage, a new job, or nearing retirement. This will keep your portfolio on track, Tata Capital noted.