Just like having a strong core is very important for building a healthy body, investing in a diversified passive core strategy, as a part of your total portfolio, is also very important. The new smallcase platform is built to help you achieve the same. On the new platform you can invest and track your core and satellites separately.
Building the core with All Weather Investing smallcase
Through the All Weather Investing smallcase, you can invest into gold, equities (stock market like returns) and fixed income (bank fixed deposit type returns) as a part of one single smallcase. This smallcase is designed to provide stable long-term returns and ensures that the core of your portfolio is strong, protected and growing.
The fixed Income portion of the All Weather smallcase always generates positive returns. The equities portion moves with the market to generate high long-term returns, while the gold portion protects your investment when the markets crash. Intelligent quarterly shuffling of your money in these asset classes through a rebalance ensures that your money is always in the right place at the right time.
A majority portion of your total investment should always be in the core – All Weather Investing smallcase. It should be the first step towards starting your investment journey.
Building satellites with other smallcases
Satellites are the investments apart from the core. On the smallcase platform, satellites are the portfolios that are riskier than the core All Weather Investing smallcase, but also have the potential of offering greater returns.
You should be investing into satellite smallcases along with the core All Weather Investing smallcase to generate alpha–additional returns. These smallcases give you pure equity exposure. Satellites are also divided into two parts– slow moving satellites (moderately risk smallcases) and fast moving satellites (high risk smallcases).
Slow moving satellites
These are the smart beta smallcases with an objective to generate more returns than the market. These smallcases only consist of large-caps, which are the top 150 market cap stocks listed on NSE. They are riskier than the core All Weather Investing smallcase and move up or down with the benchmark equity indices like Nifty. But with more risk comes more returns. These smallcases are perfect for long-term equity investing to generate market-beating returns. Three smart beta strategies are available on the platform.
Your first satellite investment should always be in one of the smart beta strategies.
Fast moving satellites
These smallcases majorly consist of mid-cap and small-cap stocks. They help you take exposure to themes, ideas and sectors of your liking. You can also invest in them for the short- and medium-term. They help you take exposure to themes like tourism, GST Implementation and increasing rural demand, among others. These smallcases can generate high returns, but are very volatile in nature. Thus, you should look into investing in them only after you have built your core and have also invested in the slow moving satellites.
This is how you can use the core-satellite approach to build an investment portfolio with smallcases to create wealth over the long-term.
For more on building a core-satellite portfolio, check out the video below.
How much to allocate to Core vs. Satellites?
Many investors ask us how much money they should allocate in their core portfolio vs. their satellite portfolios. Every investor has different circumstances like their age, number of dependents, etc. that determine their ability to take risk – and then there is the more subjective assessment around the willingness to take risk. The risk profile of any investor is dependent on these 2 factors – and how much they should allocate to core vs. satellites is a direct outcome of this.
As a general rule of thumb: the more time horizon one has, the more risk they can take & hence the higher the allocation to satellites. Let’s look at a few sample examples of suggested allocations:
- 25-year old with 0 dependants: This person has a high ability to take risk, mainly due to the young age & the fact that they have no dependents. They can follow a 40/30/30, 30/40/30, or even a 20/40/40 allocation to core/slow-satellites/fast-satellites, depending on their willingness to take risk
- 35-year old with 2 young dependants: This person has a long-term horizon but also 2 dependents, and as such probably has a moderate ability to take risk. A 50/30/20 or a 50/40/10 allocation can be followed in such a case
- 45-year old with 1 child & 1 elderly dependant: This person is likely to not have a very long-term horizon, given they have an elderly dependent and possibly an older child, i.e. they might need to pull out capital in between. As such, they can have a 70/30/0 or a 75/25/0 allocation
- 55-year old with 1 dependent spouse: This person perhaps doesn’t have a very long-term horizon, given they are approaching retirement. It would be advisable to put a bulk of their available capital in the relatively less risk Core – as such, an, 85/15/0, 90/10/0, or even a 100/0/0 allocation to core/slow-satellites/fast-satellites can be followed
- Retirees saving for grandchildren: If one is saving/investing for loved ones like children or grandchildren, then one must keep in mind the recipient’s time horizon, and not one’s own time horizon. For example, if you are a retired person of 65 years age & would like to make an investment for your 5-year old grandchild that they will get on turning 25-years – in this case, given the 20 years the child has ahead of them gives you the ability to take on additional risks. In such an instance, one can do a 20/40/40 allocation or similar as discussed in the first example
Please note the above examples are exactly that – hypothetical examples. They are not, and should not be considered as, investment advice. If you need additional help, please get in touch with a registered investment advisor or a certified financial planner who can help you understand your risk-profile & come to a decision. Happy investing!
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