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The core strategy, which is described by name itself, fundamental and principal are in nature stable, low beta fund, low risk and possess long term growth potential. It uses passive strategies like index funds, ETF, and stocks that generate returns consistently over the long term.
The satellite strategy is basically a high beta and high-risk fund, actively managed as per the current market trend to generate higher returns, like small caps.
These strategies are used to balance between stability and higher returns.
Let’s dive into the deep to understand better about the strategy which I have classified as per age.
I believe young age has more time to be in the market, more years to take risk than middle and older age.
Let’s understand with the graph of 2R
As responsibility increases, risk also increases with growing age. We need to know how to balance.
Risk also can be described as less age in hand to retire.
So, the Core-Satellite strategy works with age. It may contradict with those who are financial stable or rich class, but still, it involves risk as age reaches to retirement.
Further, it could be described as the four stages of life cycle:
Ages Between 22 and 35: Ages between 22-35 can be considered as risk-takers. These young minds look for high risk and high return. It can be more aggressive than defensive. More time to retire in hand, you can choose portfolio allocation between Core & Satellite in ratio of 60:40 for the period of 25–25 years.
Ages Between 35-42: These kinds of age investors are moderate risk-takers, look for medium risk with high returns. These are 2nd stage kinds of people as responsibility increases, risks also increase. At this age, they have EMI’s like home, car, children’s fees, etc. They can choose portfolio allocation between Core & Satellite at the ratio of 70:30 for the period of 20–25 years.
Ages Between 42 and 55: Middle adulthood age, at this age liability is more. Due to increasing age, these people want to free themselves from all kinds of debts. They usually get much higher responsibilities, like children’s higher education, marriage, etc. and it also involves a high level of risk of not losing a single penny. You can choose portfolio allocation Core vs Satellite in the ratio of 80:20 for the period of 10–15 years.
Ages Between 55 and 60: At this time of near retirement, investors should move to conservation. So that their gains should not vanish in a sudden market crash. At this age, the amount of risk is much higher as age reaches near retirement. Choose portfolio allocation between Core & Satellite at the ratio of 90:10 for the period of 5–10 years.
Final thought, we must know our age and stages to choose wisely between the Core & Satellite strategy to capitalize on wealth while balancing stability and capital preservation. Finally, one should consider a few points before investing, like risk appetite, investment goals and time horizon.
Written By,
Surendra Jauhari
Disclaimer: This is only for understanding and educational purposes. Mutual Funds are subject to market risks. Read all scheme related documents carefully.