Building a Core Satellite Investment Portfolio

Crafting a healthy investment portfolio is similar to constructing a sturdy and aesthetic building – it needs a solid foundation, strong building blocks, and good exteriors. The core-satellite methodology follows the same approach and helps you identify which of your investments are acting as the core foundation of your portfolio to provide the necessary stability & protection, and which ones are more volatile but have the potential to generate higher returns.

In this blog, we’ll introduce you to the core-satellite way of building a healthy portfolio.

The Core-Satellite Approach 

In the financial world, the core-satellite is a popular investing strategy that focuses on finding the ideal balance between different asset classes for maximising risk-adjusted returns.

First things first, let’s understand what is the core-satellite approach. By definition, the core part of your portfolio is supposed to provide stable returns and low volatility to your portfolio. Eg: short-term debt mutual funds, asset allocation mutual funds or smallcases etc. On the other hand, satellite assets are supposed to provide growth and additional returns to your portfolio. These satellite assets are riskier but also have the potential to provide higher returns.

To help you understand this concept better, let’s think of these assets in terms of volatility.

Core – Stable Assets – Stable assets form the foundation of the portfolio and typically consist of low-risk investments that provide stability and long-term growth. A great example of this on smallcase is the asset allocation-based Timeless Asset Allocation smallcase (previously known as the All Weather Investing or “AWI” smallcase) which is designed to provide stable long-term returns and ensure that the core of your portfolio is strong, diversified, protected and growing. A solid core protects your portfolio against extreme market volatility and sudden crashes. 

A majority portion of your total investment should always be in stable assets. 

Fast-moving Satellites – Steady Assets – These assets are more volatile and riskier than the stable core assets, but also have the potential to generate higher returns than the core assets. These assets are essential for enhancing long-term returns. An example of this on the smallcase platform would be the Top 100 Stocks smallcase which is riskier than the stable core smallcases like Timeless Asset Allocation smallcase, but offers higher return potential due to the pure equity nature of the smallcase.

A significant portion of your long-term investments should be in steady assets to enhance the return potential of your investment portfolio

Slow-Moving Satellites – High-Growth Assets – These are extremely volatile assets and generally consist of single stocks, MFs or smallcases providing exposure to mid and smallcap segments of the market. These assets are more risky than the core and slow-moving satellite assets.   An example of this type of asset is the Value & Momentum smallcase which has a high exposure to small and mid-cap stocks.

These assets are not considered to be essential for creating a balanced portfolio, but can significantly increase the return potential of your portfolio if added in the right quantity for the long term. Considering the volatility of these assets, it’s advisable to venture into them only if you have a high-risk tolerance, understand the nature of these assets and have already allocated a significant portion of your portfolio to stable and steady assets.

On the smallcase platform, your investments are categorised into core, fast-moving & slow-moving satellites, based on the volatility exhibited by your investments. For a detailed understanding of how volatility ratios and labels are calculated for the categorisation of assets, you can refer to the Volatility Calculation Methodology. 

Benefits of Core-Satellite Strategy 

Risk Management – Diversifying across assets with varying volatilities serves as a powerful tool to control overall portfolio risk. When high-growth assets hit a rocky patch, having a mix of stable and steady assets can help cushion against extreme price swings, keeping your portfolio volatility low. This also helps investors better preserve capital during market downturns. 

Risk-Adjusted Returns – Diversification into assets with different volatilities isn’t just about managing risk; it’s also about optimising the risk-return tradeoff. A strategic mix of assets ensures you’re getting the best possible returns while keeping risk in check.

Less Active Management – With a diversified portfolio containing stable assets, investors can enjoy more predictable and steady growth without the need for constant monitoring and active management of individual securities.

Easily Implement Core-Satellite Approach with Investment Score

Using the investment score available on the smallcase app, investors can easily identify gaps in their portfolio and implement the core-satellite investment framework on their portfolio. The Investment Score reflects the current state of your investments in Mutual Funds, Stocks/ETFs, and smallcases as objectively as possible. It’s a comprehensive metric which provides an unbiased evaluation of your investments, helping you gain valuable insights into the overall health of your portfolio. 

• The score is calculated based on two factors: diversification among different assets and investing discipline.
• The score is calculated out of a total of 900. The higher the score the better it is. 
• Once you calculate your score, you’ll get actionable next steps to improve your score and enhance your overall portfolio health

Check your Investment Score on smallcase

• Visit the ‘Investments’ tab on the smallcase app 
• Tap on the ‘Unlock Investment Score’ button at the top of the page
• Import your external holdings in Mutual Funds and Stocks/ETFs. If you have already imported your holdings, you’ll automatically see your score after unlocking it.
• Once you view your score, you can also take a look at the actions that can help you improve your score 

This is a rule-driven tool applicable uniformly to all the users of the tool and does not take into account any individual risk-reward preferences, demography, financial goals or any other financial assets/liabilities that an individual may have. The tool is based on generally accepted market principles of diversification, asset allocation and systematic investing. The tool should not be construed as investment advice or research. You should seek professional advice when necessary, as the Company do not assume responsibility for any outcomes. Read more