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Source: iStock

How to use Mint50’s core, satellite and facilitator categories

The starting point in building a portfolio is to decide how much of the portfolio should be in equity and in debt

There are three primary products—ones that cater to the investment needs of the core portfolio, ones that serve as facilitators to help execute money decisions and ones that serve as riders to enhance the portfolio’s need for return or diversification or tax saving—that one looks for when choosing investment instruments.

The Mint50 list of funds includes all these types. We call these the core, facilitator and satellite portfolio categories. You can select a mix of schemes according to your financial situation.

The start point in building a portfolio would be deciding on an asset allocation to determine how much of the portfolio should be held in equity and how much in debt. For this, you would need to consider the tenor of the goals and the need for growth and liquidity in the portfolio.

For long-term goals with an investment horizon of at least five years, consider investments in core portfolio schemes. However, not all schemes are equal in terms of risk and return. For goals that are three-five years away, consider aggressive hybrid funds, for goals that are five-seven years away, consider large-caps and schemes in the large-and-mid-cap and multi-cap categories. For goals with a longer horizon, consider funds with a more aggressive strategy, in terms of market segment and portfolio management strategy. For goals that are one-three years away, consider the short-duration and corporate bond categories.

Use funds in the facilitator category to help you park your money for periods of up to one year. Select the category based on the period for which you want to hold the money. Use liquid funds, ultra-short funds and low duration funds, in that order, for money that has to be held for a short period before it is invested, money held in an emergency fund and money that has to be parked for a short period before it is used to meet goals.

Funds in the satellite category help give an additional boost to the portfolio. This boost could be for returns, stability, diversification or tax efficiency, among others. Equity fund categories such as focused funds, value or contra funds, small-cap funds can find a place in the portfolio to give heft to returns. For example, contra and value funds, typically, invest in sectors and themes that are not currently popular and as such can act as a hedge against the risks in the growth strategy followed by funds in the core portfolio. But the strategy, typically, also takes a longer time to fruition. A small-cap fund can give a return lift to the portfolio when the segment is expected to do well. You need to have an investment horizon of five-seven years and more for most of these strategies to work.

An international fund can give geographical diversification benefits to the portfolio. A conservative hybrid fund can be used to give an equity flavour to a debt-heavy portfolio if the investor does not want to take the trouble of tracking the performance of a pure equity fund. Select the satellite fund that gives what your portfolio needs.

It is not necessary to select a scheme from each of the categories. That would depend upon your goals and risk appetite. Not all schemes in a category are similar either. There will be variations in strategy and style that will impact the risk and return. The comments section in the table seeks to capture these differences. Use the factsheets of mutual funds to understand more about the return and risk in a scheme before investing.

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