Uncertainty is a part of living.
And the state of capital markets, globally, reeling under the threat of tariff wars and dynamic geo-political equations is proof enough.
In 2017, equity markets across the globe were firing on all cylinders.
Ubiquitously, markets took a U-turn when nobody anticipated them to.
And most times, during the phases of high optimism, mid caps and small caps tend to do exceedingly well. But when the tide turns, they get hammered.
The opposite is true for large caps though.
Some of the corporate giants—known as large caps or blue chips—are stable, and hence their return potential is relatively low as compared to mid-sized companies. And, thus they expose you to a lower risk too. Here, risk means the risk of losing your capital permanently.
In 2017, many mid and small cap companies and mutual funds with a mandate to invest in them performed splendidly—some even generated as much as 60%-80% returns.
But their recent performance has been miserable. So far, some of them have lost as much as 15% in just 5½ months in 2018.
On the other hand, large cap funds, on an average, have generated stable returns of 32% in 2017 and contained their fall to about 2%.
Don’t you dream to create a portfolio that gives you the safety of large caps with a return potential of midcaps?
[Read: Do You Fear The Decline In Mid Cap Funds? Don’t, If You Invest The Right Way!]
Well, that’s tough to achieve; risk and return go hand-in-hand. But making the most of market volatility is possible, although not easy.
Here’s the key!
(Image source: pixabay.com)
Create an all-weather portfolio for you using the ‘core and satellite’ strategy of investing.
You will get various definitions of core and satellite strategy.
This is how Investopedia defines it: Core-satellite investing is a method of portfolio construction designed to minimize costs, tax liability, and volatility while providing an opportunity to outperform the broad stock market as a whole. The core of the portfolio consists ofpassive investmentsthat track major market indices, such as theStandard and Poor's 500 Index(S&P 500). Additional positions, known as satellites, are added to the portfolio in the form of actively managed investments.
According to Vanguard: The core-satellite approach to portfolio construction is a methodology used to combine actively managed funds with index funds in a single portfolio. The appeal of this approach is that it seeks to establish a risk-controlled portfolio while also securing some prospects of outperformance.
These definitions look perfect in the context of developed markets where market conditions are more efficient, i.e. where the impact of news is immediately reflected in the stock prices.
At PersonalFN we formulated the core and satellite strategy for mutual funds investing and defined it differently, making it relevant for Indian investors.
According to us, the term “core” applies to the more stable, long-term holdings of the portfolio; while the term “satellite” applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions.
PersonalFN believes, if you apply this approach to invest in equity oriented mutual funds, you can get the best of both worlds, that is,short-term high-rewarding opportunitiesandlong-term steady-return investing, and the good thing is,it works!
Below are the benefits of following the core and satellite approach:
Facilitates optimal diversification;
Reduces the risk to your portfolio;
Enables you to benefit from a variety of investment strategies;
Aims to create wealth, cushioning the downside;
Offers the potential to outperform the market; and
Reduces the need for constant churning
The ‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio.
As far as yourmutual fundinvestments are concerned, the ‘core portfolio’ should consist of large-cap, multi-cap, and value-style funds, while the ‘satellite portfolio’ should include funds from the mid-and-small cap category and opportunities funds.
PersonalFN’s researchstates that 60% of the portfolio should be reserved for Core mutual funds and the balance 40%, for the Satellite mutual funds.
But what matters the most is the art of cleverly structuring the portfolio by assigning weights to each category of mutual funds and the schemes picked for the portfolio.
Moreover, with changes in market outlook, the allocation to each of the schemes, especially in the satellite portfolio, needs to change.
[Read: Why You Should Strategically Structure Your Mutual Fund Portfolio]
Please remember…
Constructing a portfolio with a stable core of long-term investments, balanced by a periphery of more short-term, satellite holdings can help tactically allocate the investible surplus and offer the potential to outperform the markets.
In this way, the satellite portfolio supports the core by taking active calls based on extensive research.
Now let’s look at what goes into creating a strategic portfolio -
The selected funds should be amongst the top scorers in their respective categories. The portfolio should be built with a time horizon of at least 5 years
It should be diversified across investment style and fund management
Each fund should be true to its investment style and mandate
They should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place
Each fund should have seen at least three market cycles of outperformance
The portfolio should contain an adequate number of schemes in the right proportion. In short, it should carry the most optimum allocation to each scheme and investment style
The number of funds in the portfolio should not exceed six or seven
No two schemes should be managed by the same fund manager
Not more than two schemes from the same fund house should be included in the portfolio
Are you wondering how difficult it would be for you to select mutual fund schemes from various categories?
PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s premium report:The Strategic Funds Portfolio For 2025(2018 Edition).
In this report, PersonalFN will provide you with a readymade portfolio of itstop equity mutual fundsschemes for 2025 that have the ability to generate lucrative returns over the long term.
PersonalFN’s “The Strategic Funds Portfolio for 2025” is geared to potentially multiply your wealth in the years to come.Subscribe now!
Happy Investing!
