Understanding Core and Satellite Portfolios

The core and satellite portfolio strategy is a structured investment approach that balances long-term stability with tactical flexibility. It divides your investments into two parts—core holdings for long-term, steady growth, and satellite investments aimed at generating higher returns through opportunistic plays.

A core and satellite portfolio is structured as follows:

• Core: The foundation—long-term, stable assets such as index funds, government bonds, or blue-chip stocks.
  

• Satellite: Tactical positions—sectoral funds, thematic ETFs, or high-growth equities aimed at boosting returns.
  

The idea is to anchor your portfolio with reliable investments while selectively adding higher-risk, higher-reward components.

A well-structured portfolio typically combines stable core assets with more dynamic satellite investments. Here’s how the two are usually defined:

• Core Holdings
  

  • Index funds tracking major benchmarks such as Nifty 50 or Sensex, which represent broader market performance.

  • Bonds or debt funds

  • Large-cap diversified equity mutual funds
    

• Satellite Holdings
  

  • Sector funds (e.g., pharma, banking)
    

  • Thematic ETFs (e.g., ESG, digital tech)
    

  • International exposure or small-cap stocks
    

  • Tactical bets like gold or REITs

The core-satellite approach is described as having several advantages for investors, making it both flexible and reliable. Some of the key benefits include:

• Diversification of asset classes
  

• Optimised risk-reward balance
  

• Customisable for any investment style
  

• Enables active investing without jeopardising the base portfolio
  

• Flexible strategy across market conditions

Typical steps followed in constructing such a portfolio include:

1. Determine Financial Goals & Risk Appetite
   Understand your long-term vs short-term objectives.
   

2. Allocate the Core (Typically 60–80%)
   

   • Core allocation generally consists of stable instruments such as index funds, bonds, or balanced funds.
     

   • Ensure consistency and minimal turnover.
     

3. Choose Satellites (20–40%)
   

   • Identify themes, sectors, or strategies aligned with your outlook.
     

   • Examples: momentum stocks, new tech funds, or global equities.
     

4. Regular Rebalancing
   

   • Reassess allocation every 6–12 months.
     

   • Rebalancing is commonly done by reviewing asset performance and adjusting allocations based on market movements.

Once the stable foundation of the core is in place, investors can explore different approaches to build the satellite portion of their portfolio. Some of the most common strategies include:

• Sector Rotation
  Rotate funds between outperforming sectors like IT, pharma, or banking.
  

• Tactical Asset Allocation
  Take short-term positions based on macroeconomic trends or global cues.
  

• Thematic Investing
  Invest in future-facing themes like electric vehicles, ESG, or digitisation.
  

• Geographic Diversification
  Include U.S., European, or emerging market exposure as satellites.

While a satellite portfolio can enhance returns and add diversification, it also comes with certain pitfalls that investors need to watch out for:

• Overexposure to High-Risk Assets
  Satellite allocation should not overpower the core.
  

• Market Timing Errors
  Active satellite management can backfire during volatile periods.
  

• Higher Costs
  Satellite investments often involve higher fees.
  

• Complexity
  Too many moving parts can complicate portfolio tracking.

A core and satellite approach combines the steadiness of core holdings with the growth potential of satellites. By customising your allocation and reviewing periodically, you can build a resilient, goal-oriented investment strategy suitable for changing markets.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.