Core & satellite MF model works better in volatility | Economic Times

As the investment style of holding a concentrated portfolio loses followers in an era of heightened uncertainty, investors are exploring options to keep their holdings well-diversified without losing the edge. One such strategy that wealth managers are recommending mutual fund investors these days in Core-and-Satellite investing, which involves holding a low-cost passive fund as the key part of the portfolio and various actively-managed schemes that will help spread out risks.“The core portfolio could consist of passively managed large-cap funds, while the satellite component could consist of actively-managed funds in the mid- or small-cap space, value, thematic space that helps generate alpha,” says Anil Ghelani, head (passive investments), DSP Mutual Fund.An example of such a strategy would be an index fund accounting for 80-85%, which is the core portfolio. Thematic, small-cap, country-specific or international funds could be the satellite portion of the holding. Ghelani believes if the core portfolio meets market returns, that may be enough for many investors to meet their life goals.Financial planners say the core part of the allocation should be to large-cap companies as many of them are leaders in their respective business, have strong financials and are in a better position to weather any downturn in the economy compared to smaller companies.“Investors could allocate about 60-80% of their portfolio to passive large-cap funds, with the balance being allocated to a mix of mid- and small-cap funds, “ says Vijay Kuppa, founder, Orowealth. Kuppa recommends two -thirds allocation to the Nifty 50 and one-third allocation to the Nifty Next 50 fund.The aim of the strategy is to achieve higher returns with lower risks. The low costs of passive funds like ETFs and index funds improve portfolio performances automatically compared to active schemes with higher expenses.Kuppa prefers passive funds as many actively-managed large-cap funds have struggled to beat them. Financial planners said investors should take tactical bets in their satellite portfolio and look for good entry and exit points here. “Likely disinvestment of PSUs and an uptick in the investment cycle, could benefit manufacturing, PSUs, infra and utility companies,” said Anup Bhaiya, MD, Money Honey Financial Services. He advises investors to consider ABSL Manufacturing Equity Fund, Invesco India PSU Equity Fund and IDFC Infrastructure Fund.