Definition:
The investment in core and satellite mutual funds is a portfolio design consisting of a “core” investment and other “satellite” funds that complement it. Like many top strategies, core and satellite investing is simple and effective for long-term investment and hold.
Definition and Example of Core and Satellite Mutual Fund Investing
Core and satellite investing is a common and time-tested portfolio design that consists of integrated investments. It is organized around a “core asset,” such as a large-cap stock index fund, which makes up the bulk of the portfolio. Smaller funds, known as “satellite funds,” complete your portfolio and make up the remainder of your investments.
For example, you might choose a single large-cap fund and invest 30% to 40% of your portfolio in it. You would then fill the remaining 60% to 70% of your portfolio with several smaller investments in other funds or asset classes.
The goal is to achieve above-average returns with lower risk. Using this type of design, the satellite assets provide diversification that reduces risk, while the core asset delivers a large share of returns and growth. Your overall portfolio should outperform a standard benchmark for performance, such as the S&P 500 index.
The core and satellite approach is intended for long-term investors interested in growing wealth over time rather than repeatedly trading. It prevents you from trying to select “winning” stocks. It lowers management fees and commissions. It also provides you with greater diversification within your portfolio.
Note: Mutual funds are smart assets for investors who hold them long-term due to their reliable rates of return, which typically outperform inflation over the long run.
How Core and Satellite Mutual Fund Investing Works
One of the first things new investors learn is the value of diversification. It is essential for asset classes, sectors, and markets, and it helps protect you when one investment declines. One of the simplest ways to achieve this is through mutual funds and index funds. The core and satellite strategy aims to help you with that.
Funds are generally the best investment medium for most people. They reduce the time and research often required to pick quality individual stocks. Funds allow you to buy one thing to cover many investments since a mutual fund will contain a collection of related stocks. It’s a potential win. You can have many investments without looking at individual companies, giving you immediate diversification.
You will also see lower commission costs because your portfolio will have less trading, meaning fewer purchases. You can have lower costs even if you choose to invest in index funds. Their management fees tend to be lower than actively managed fund expense ratios, making them more accessible to regular investors.
Source: https://www.thebalancemoney.com/what-is-core-and-satellite-2466544
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