Core Portfolio Strategy – Debt and Equity

Shobhit Gupta
Director & Co-Founder, Moneygain Consultants Pvt Ltd

While planning for your financial goals, you would always expect the investment portfolio to provide linear returns for achieving your financial goals; however, the markets are not that kind to the investors. In the era of globalisation, a news event in one part of the world carries the potential to impact the markets in the other part. Thus, the investors must aim to mitigate the investment risk to the possible extent.

With this investment objective, financial advisors advise to follow core-satellite investment strategy, wherein, the core of your portfolio is invested in stable asset classes and investments, while the satellite component can provide a cushion to the returns, generated by adopting a relatively aggressive investing strategy. The main investment objective to adopt a core-satellite strategy is to maintain a diversified portfolio, helping the investors to mitigate the investment risk. The proportion of core and satellite within the investment portfolio may be different for different investors. Further, as one move from the core towards the satellite portion, the investment style turns relatively aggressive in order to generate higher alpha and also, generate higher average returns for the portfolio. 

Further, even within the core portfolio, the investors must maintain an optimal asset allocation to enable them to achieve their long-term financial goals. The investors must maintain a diversified core portfolio spread across asset classes, so as to achieve stability as well as growth for such portfolio, which aims to help the investors reach out to their goals. With the availability of investment securities across the asset classes, the investors have a wide range of choice to invest for their financial goals and they may choose to allocate their core portfolio as per the respective risk-reward trade-off. Such an investment strategy will also align the investment portfolio with a relative time horizon, priority of financial goals and risk appetite.

The core portfolio may further have 2-3 tiers within itself, wherein, the beginning level will tend to provide a strong foundation to the investment portfolio e.g. large-cap mutual funds, passive investment securities, index funds etc. Large-cap and index securities generally behave greatly like core portfolio securities, as it is believed that the markets always remain a step ahead of the actual news and hence, the fundamentals drive the stock and investment performance. Further, the availability of credible information in public domain makes the task of fund manager tougher to generate alpha and hence, lower costs, especially in passive funds, help the investors to generate better returns. Further, the debt component aims to provide stability to the portfolio, albeit with reasonable returns. It must be noted that the aggressive or conservative nature of portfolio is a relative term and not constant for all the investors. While the 80:20 asset allocations towards debt and equity may be a conservative portfolio for most of the investors, some may still consider it aggressive due to the presence of 20 per cent equity. Similarly, a 50:50 asset allocation may be an aggressive strategy for one investor while conservative for the other.

With the passage of time, it is expected that the satellite portion shrinks, while the core portfolio grows due to the adjustments to align with a changing risk profile. As such, the portfolio should be periodically reviewed and rebalanced to match the modified investment strategy. Given the need of optimal asset allocation to be maintained in the core portfolio, one may also choose to invest in dynamic asset allocation funds, which aim to maintain the asset allocation as per the relative valuations. Such funds aim to increase the investment exposure when the valuations are lower, while book profits when the valuations in a particular asset class seem expensive. As such, the investors are benefited from ‘buy low sell high’ strategy while staying diversified across the asset classes.

A core-satellite portfolio strategy is thus, an interesting and simple investment strategy to build long-term investment portfolio.

The writer is a Director & Co-Founder, Moneygain Consultants Pvt Ltd n Email id : shobhit@mymoneygain.com  Website link : www.mymoneygain.com