What is a core-and-satellite portfolio and why it matters for mutual fund investors

A core-and-satellite portfolio is an investment vehicle that divides your money into two segments: the “core,” composed of low-cost, stable funds, and the “satellite,” composed of riskier, actively managed funds. The hope is to stabilize a portfolio with stable long-term returns while also having some room to make tactical bets that can earn extra returns.

The function of the core

The core is typically composed of diversified, large index funds or ETFs. They are linked to large market indices such as the Nifty 50 or Sensex and therefore make your portfolio rest on solid ground. Being less costly and reducing the risk of underperformance, they keep the portfolio anchored in the face of volatility. For the average investor, 60–80% of the investment goes into the core.

The role of the satellite

The second piece is a satellite that is used for active strategies and can be sectoral funds, theme funds, mid-cap/small-cap funds, or even foreign funds. The concept here is to layer additional returns upon something utilizing deliberate risks. Because the second piece is of modest size, typically 20–40% of the portfolio, it doesn’t throw all your investments out of balance even when bets taken do not materialize as imagined.

Why Indian investors should try it

For Indian investors who face both rising market opportunity as well as volatility, this approach offers a disciplined way to diversification. The satellite enables you not to miss out on the growth in the core, while the satellite gives you flexibility to ride the new themes such as technology, energy transition, or global markets. It is also tax-effective as the stable core reduces the necessity of frequent churning.

The bottom line

The core-and-satellite approach combines the best of both worlds—discipline and growth. By having your portfolio rooted in low-cost, wide-moat funds and employing active investments judiciously to navigate opportunities, you can create higher risk-adjusted returns. That is why it might be an attractive choice for Indian long-term investors seeking safety and potential upside.

FAQs

Q: How much should I invest in the core and the satellite?

A: That will depend on your risk profile. You can have 80 in the core and 20 in the satellite if you are conservative, or 60:40 if you are an aggressive investor.

Q: Can I switch the satellite funds often?

A: Yes, but check them every now and then, at least once or twice a year. The game is to benefit without switching too much, which will increase expenses and destroy tax efficiency.

Q: Do active satellite funds have a place in the universe?

A: Not significantly. You can utilize concentrated ETFs or thematic index funds as well. But the majority of investors do maintain active funds in the satellite in an effort to deliver alpha.