What is a core-satellite portfolio strategy?

A core-satellite portfolio is an investment strategy that consists of two parts- core investment and satellite investments. This strategy is implemented with a view to reduce costs, risk, volatility of the portfolio and thereby, maximise the returns from the portfolio. Here, the aim is to outperform the markets and create wealth in the long term. It is a flexible strategy that incorporates both strategic asset allocation and tactical asset allocation. Let’s find out more about this strategy! 

Core portfolio- 

This portfolio comprises mostly index funds and large-cap stocks, which do not need constant monitoring. Hence, this portion of the portfolio can be passively managed. The main aim of this portfolio is to create long-term wealth and fulfill investment objectives. To do so, investors make use of strategic asset allocation. The cost of managing this part of the portfolio is low. In addition to this, there is a lower churn in investments. Moreover, the portfolio has a low beta since the investments are done in instruments with low volatility. 

Satellite portfolio- 

This portfolio accounts for a small portion of the investment funds and is used to take advantage of the market situations i.e. riding on the trends to create additional wealth. To do so, investors make use of tactical asset allocation. The main aim of this portfolio is to outperform the benchmark indices. This portion of the portfolio needs constant monitoring and hence, it is actively managed. It comprises mostly small and mid-cap stocks, which are considered to be riskier investments. The cost of managing this part of the portfolio is high as there is active trading involved. Also, there is a higher churn in investments. The portfolio has a high beta since investments are done in instruments with high volatility.