Your Money: How the Heart-Satellite Wallet Works

By Hemanth Gorur

Investment approaches and strategies have proliferated over the past two decades, so much so that investors tend to confuse similar strategies. The core-satellite portfolio strategy is one such approach, which can be confused with the popular static asset allocation strategy. Let’s decode the core-satellite portfolio strategy and examine its applicability.

What is Core-Satellite Wallet
The core-satellite portfolio concept has its origins in the selection of passively and actively managed funds to construct investment portfolios. While passively managed funds provided long-term stability and formed the core portfolio, actively managed funds can generate higher returns and form the satellite portfolio. Passively managed funds involve low cost and lack of fund manager involvement, which significantly reduces core portfolio risk. Actively managed funds generally carry higher risk, but are also more likely to generate higher returns, making them ideal for tactical portfolio shifts.
It is important to note that the core portfolio should be a significant part of the overall portfolio, remain relatively intact, and money should never be taken out of it until the identified goals have been achieved. The satellite portfolio may be partially liquidated if necessary.

In recent years it has become an accepted approach to have both core portfolios and satellite portfolios to understand both actively and passively managed investments, with the caveat that the core should be “stable and unchanged in its composition” while the satellite could be “more risky”. and changeable”.

How is it different from static asset allocation?
The core-satellite portfolio strategy is not the same as the static asset allocation strategy, which dictates that the percentages of the four asset classes of stocks, debt, commodities and real estate in your portfolio are set according to your financial objectives, financial situation, investment horizon and risk appetite. Using just equity and debt as an example, let’s say your target allocation was 60:40 in favor of equity. Also suppose you want your main and satellite wallets to be in the 75:25 ratio. You now have four portfolio compartments that you must fill with the investments of your choice: Core-equity, core-debt, satellite-equity and satellite-debt.

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This could be achieved by including, for example, a benchmark index fund (20% of the overall portfolio), a large cap fund (10%) and a mid cap fund (10%) in the core equity tranche . The core debt tranche could include government securities or G-Secs (20%) and term deposits (15%). Similarly, the satellite-equity tranche could include a small cap fund (10%) and a dividend-yielding fund (10%), while the satellite-debt tranche could include a floating fund (5%).

Precautions for the core-satellite strategy
A common misconception is that the core must be entirely composed of debt or risk-free investments to be stable. Again, the satellite portfolio can be confused with a purely stock portfolio since it is supposed to produce higher returns at higher risk. But long-term debt instruments also have a higher risk-return profile. In addition, the target equity-debt allocation does not need to be achieved individually in the core and satellite portfolios. Instead, your overall portfolio should reflect the target asset allocation ratio.

Finally, the choice of investments for each of the four sub-funds is specific to the individual and need not be the same for all investors as their investment preferences and risk profiles vary.

Before using the core-satellite portfolio strategy, understand the differences from traditional asset allocation approaches, construct a few alternative core-satellite combinations that meet your target allocation, and choose one that you are comfortable with. comfortable.

The writer is the founder, Hermoneytalks.com

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