Uncertainity in markets? Adopt Core & satellite strategy for safety and high returns

It's a rare investor who approaches investing with a clinical precision, following a disciplined approach while picking up stocks, researching his mutual funds before zeroing in on them, aligning his investments with his financial goals. Most people simply pile on different investments as they go, buying the most fancied stock or the hottest mutual fund in the market. Before long, the portfolio bloats into a messy ensemble, which does not give a true picture of their risk profile.


This lack of technique can not only endanger your finances but also place your goals out of reach. At such times, people turn to financial advisers to set the house back in order. However, there's an easier option. If you follow an appropriate investment strategy, you can avoid being in such an unseemly situation in the first place. One such approach that could serve you well in these uncertain times is the 'core and satellite' investment style.

What is the core and satellite approach ??

It's a simple strategy, which seeks to combine the best of both worlds-safety and healthy returns-by segregating investments in two portfolios. The core, which has the bigger portion of your corpus, comprises quality investments that lend stability and diversification. The satellite, or the smaller portion of your corpus, is invested mostly in risky assets that provide higher returns to the overall portfolio.

This approach aims to yield above average returns, while keeping volatility at a bare minimum, and is a tool many financial advisers use to help clients strike the perfect balance. However, an apt question at this point would be if it's the right time to adopt this strategy. Given the uncertainty surrounding the economy and the markets , it makes sense for the investor to provide a cushion to his portfolio.
If the conditions worsen, the core portfolio should act as a buffer. If the situation begins to improve, then your satellite portfolio can kick in with higher returns. "This approach to asset allocation will help generate stable returns over the long term through the core portfolio, while retaining the ability to generate superior alpha through the satellite part of the portfolio," says Vinay Kulkarni, fund manager, HDFC Core & Satellite.

How to build a portfolio

If you are convinced about the approach, here is how you can adopt it and go about building a core and satellite portfolio. First, establish a clear demarcation between the two so that you can manage your investments better. This means you will have to keep your core and satellite investments separate because mixing one with the other will defeat the very purpose of this strategy