Satellite portfolio to the rescue

In a core-satellite framework, the core portfolio relates to goal-based investments, while the satellite portfolio captures short-term price movements in the market. Here, we discuss the benefits of having a satellite portfolio alongside your core portfolios.

Managing gains

The satellite portfolio is about market timing. Actively buying and selling ETFs and individual stocks, for instance. There are two benefits from managing a satellite portfolio. Suppose you buy a stock at ₹500 and sell it at ₹700. There is the pleasure of generating gains. Suppose the stock dips after you sell it. The emotional satisfaction of perfectly timing the market is profound, though you may realise luck played an important role in the process. This pleasure of generating gains does not diminish even if you self-manage your satellite portfolio for many years.

What do you do with the gains from the satellite portfolio? Often, we reinvest the proceeds into the satellite portfolio, confident about market timing. But it pays to hold some gains and invest in bank deposits.

You can plough back the proceeds into the satellite portfolio when you incur losses. Also, you can use these funds and some from the satellite portfolio to manage any shortfall in your core portfolio. That is the second benefit.

Suppose one of your core portfolios must generate 12% pre-tax return on equity investment to achieve a goal in eight years. Now, suppose the actual return in year three is 10%, two percentage points short of the expected return.

If you do not bridge this shortfall, the gap can widen by the end of eight years. You can bridge this gap with more contribution into equity investments. But how will you raise savings without cutting into your current consumption? You can transfer some amount from the satellite portfolio to the core portfolio in any year the core faces a shortfall.

Conclusion

Transferring from satellite to a core portfolio will reduce trading capital. You can transfer the amount from the core back to the satellite once you create buffer capital in the core portfolio. Suppose you have ₹1 crore equity investments and the expected annual return is 12%.

After you transfer from the satellite to the core portfolio, suppose the equity investment earns 14%. You can transfer two percentage points of the investment value, ₹2 lakh or the actual amount, which is lower, back to the satellite portfolio.

(The author offers training programmes for individuals to manage their personal investments.)