Why you should look to build a core and satellite portfolio

As broad benchmark indices trade close to lifetime highs and valuations turn rich, financial planners believe it is essential that equity investors build a core and satellite portfolio that combines both active and passive strategies.

The core portfolio with a two thirds allocation should be long-term oriented and could be tilted toward categories that are large-cap, with a small allocation toward mid- and small-caps.

The remaining one-third could be used to take tactical bets on sectors or themes where they anticipate sharp upward moves and can time their entry and exit to generate alpha in portfolios.


"The core portfolio which is an anchor for your portfolio could comprise of active funds like multi-cap, flexi-cap and focused funds, while the satellite portion could be used to make tactical investment bets based on sectors and themes which are relevant at that time," says Anand Vardarajan, chief business officer, Tata Mutual Fund.

Increasingly wealth managers believe it is important to have a mix of both active and passive schemes in their portfolio to optimise returns and not choose between the two. Active funds could help investors manage risk better in bull markets as the fund manager would largely stay away from low-quality companies. Passive index funds help investors save on costs, avoid fund manager bias, and help in capturing market returns.

"With a number of scheme launches in the passive and smart beta space like real estate, pharma, tourism, IT, defence, private bank index fund, momentum, low volatility funds investors bullish on any such theme get to participate through easy entry exit at low cost, " says Anup Bhaiya, CEO, Money Honey Financial Services, a Mumbai-based mutual fund distributor.

Bhaiya suggests after the sharp rally, in themes like CPSE, defence, PSU banks and PSU funds investors should take profits. "Investors could play short tactical upcycle stories through a mix of sectoral funds, index and smart beta funds," says Nirav Karkera, head (research), Fisdom.