How to build a thrilling yet stable portfolio

A core-satellite portfolio mix is the ideal approach to mutual fund investing. This strategy caters to both the desire for security (core portfolio) and the thrill of potential high returns (satellite portfolio), mimicking the way the human brain seeks both dopamine (security) and adrenaline (excitement). By combining these two approaches, you can achieve an optimal balance in your portfolio and potentially maximize your returns while managing risk

“Core aur satellite portfolio mein fark hamesha hota hai

Core, dopamine toh satellite, adrenaline deta hai”

Translation: Between Core & Satellite Portfolio, draw a clear-cut line.

Core is like Dopamine; Satellite is like Adrenaline.

Core and Satellite Portfolio – What the mind seeks! “I’m on top of the world eh! I’m on top of the world eh.” This song by Imagine Dragons sure does take you to the top of the world. And does wonders to your mood. Much of this feeling has to do with an amazing place that we all have within us. Our Brain!

The human mind is indeed fascinating. Everything that we do is triggered, controlled, and monitored by this seemingly small mass inside our head. Enter Dopamine, a hormone released by the brain.

Dopamine or the happy hormone helps us stay in the best of moods due to experiencing that feeling of being secured and calm. Similar to the feeling we get when we look at our CORE mutual fund portfolio of say Equity Diversified funds, Index funds and Fixed Income, all these chosen for providing a steady return over the long term. Typically, 70-80 per cent of your overall MF portfolio can be your core. Here, you don’t expect chart busting returns or want to ride the highs of the market always. What you only seek is stable and consistency in returns over a long period of time, where the drawdown is less and you are cushioned during market volatilities. Many investors look to create their core through long term SIPs which help them slowly but steadily diversify their portfolio, which perhaps is one of the basic tenets of long-term investing. One of the often said things about a core portfolio is –‘’Go Where the Market Takes You’’, where you don’t want to time the market or are on the lookout to book profits whenever the markets get on a high. Equity Index Funds typically can do that where you are happy with just the beta returns- the returns of just being in equity overall. A core MF portfolio therefore can give you that feeling of feeling secure and happy for a long time. Dopamine at work, perhaps?

But there is another truth of life, that at times we want excitement and thrill. That rush of blood which makes you feel invincible and the best. We all have experienced that feeling when we have won in sports, got a large bonus or promotion, bungee jumped or when we fell in love. Say hi to Adrenaline, the hormone released by our good friend again, the Brain!

Much like in life, we seek this adrenaline rush in our MF investments too. That market timing which went perfect, that sector bet which absolutely worked. A Satellite portfolio, unlike a Core portfolio is one which chases a high risk-high return strategy with the sole aim to capitalize on market opportunities and trends and give a kicker to the overall portfolio. You downplay the risks in your mind and focus purely on the alpha generating potential of your funds. Many investors make a 15-20 per cent of allocation in creating a satellite portfolio, though this number really depends on one own risk-taking profile. Thematic or Sector Funds, International funds FOF’s can be a few examples in a Satellite portfolio. In such a portfolio, you take an active interest in researching stocks, sectors and even fund management styles to invest in funds which have the potential to give you very high returns.

So what’s it gonna be? A core or satellite?

Like the mind seeks both Security and Thrill, so does our investing mindset. A Core-Satellite mix approach to mutual fund investing can not only answer your Brain’s desire to give you Dopamine and Adrenaline from time to time, but also help you get an optimum balance in your portfolio. A bit of fungibility can be done but it should be unidirectional, meaning that the allocation to Core portfolio may be increased at the expense of the Satellite portfolio but not vice-versa. So a mix of both it is. And in that case, you will do well by listening to Jon Denver’s “Country Roads Take Me Home” along with Imagine Dragons!

(The writer is Senior Vice President, SBI Funds Management Limited)

(Translation & Synopsis by Prashant Sarangi Vice President & Head-Corporate Communications, SBI Funds Management Limited)