Investors must consider several key factors when selecting the best mutual fund scheme. These factors include consistent mutual fund returns, strong historical performance, a reliable fund manager, and a low expense ratio. Additionally, it is essential to devise a sound portfolio strategy to maximise returns. Two common portfolio strategies for mutual fund investors are core and satellite investment strategies. Let’s take a look:
Understanding core and satellite portfolio strategy
The core portfolio strategy includes low-cost, passively managed large-cap funds, index funds, and exchange-traded funds (ETFs). As the name rightly suggests, a core portfolio forms the center of an investment portfolio to generate higher returns with low risk over the long term.
On the other hand, a satellite portfolio strategy includes actively managed funds, such as sectoral and international funds, that aim to generate alpha returns in your portfolio.
How do these strategies work?
The core strategy in a portfolio is constructed considering long-term objectives like retirement and child education. It accounts for around 70%–80% of the portfolio and comprises indexes, ETFs, diversified equity, and large-cap mutual funds.
On the other hand, the satellite strategy is a minor component of the overall portfolio, usually 30-20 per cent, and is handled tactically to capitalise on economic and market situations. Examples include long-term gilt funds, sector-specific funds, and international funds.
The core portfolio provides stability and potential returns for long-term growth. Meanwhile, the satellite portfolio provides an additional risk-adjusted return, which helps boost total returns.
Below is an example of a Core-Satellite mix
The core portfolio consists of funds such as large-cap ETF (10 per cent), large-cap funds(20 per cent), midcap active funds(20 per cent), Ultra short-term debt funds(10 per cent), as well as EPF and bank deposits (20 per cent) can also be part of it. On the other hand, international funds (5 per cent), stocks (5 per cent), and long-term gilt funds (10 per cent) can be part of a satellite portfolio.
Which strategy should investors select?
One significant advantage of investing in a core portfolio is that it minimises investor expenses by including index funds and ETFs. While small differences in expense ratios might seem insignificant initially, they can add up to have a substantial impact over time.
It’s important to note that index funds, as part of the core portfolio, have the lowest expense ratios, which is beneficial in the long run. Similarly, the satellite portfolio allows investors to tilt their portfolios to take advantage of the prevailing market conditions and get more returns.
When following any portfolio strategy, investors should consider their recommended asset allocation and financial goals. For investors who understand their risk profile, having both a core and a satellite mutual fund portfolio strategy can be beneficial.
This helps to balance the need for long-term and tactical short-term investments. Mutual fund schemes are constructed with a relatively long-term approach, with minimal stock churning, and fund managers’ focus is more aligned with long-term compounding rather than quick short-term strategies.
The core portfolio is built with long-term objectives in mind, such as retirement and child education, while the satellite portfolio offers an additional risk-adjusted return to enhance overall returns. Let’s find out which option is best for you. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
