What Is Mutual Fund Core and Satellite Investing?

Definition & Examples of Mutual Fund Core and Satellite Investing

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Core and satellite is a common and time-tested investment portfolio design that consists of a core investment and other satellite funds that complement it. Like many of the best investing strategies and philosophies, core and satellite is simple and effective, especially for long-term, buy-and-hold investing.

Learn more about the mutual fund core and satellite investing strategy, how it works, and who should use it.

What Is Mutual Fund Core and Satellite Investing?

Core and satellite is an investment portfolio design containing a core investment—such as a large-cap index fund—which represents the largest portion of the portfolio, and various smaller funds, known as satellite funds, that add up to create the whole.

This portfolio design's primary objective is to reduce risk through diversification while outperforming a standard benchmark for performance, such as the S&P 500 Index. The goal is to achieve above-average returns with below-average risk for the investor.

How Mutual Fund Core and Satellite Investing Works

One of the first investment fundamentals new investors learn about is diversification. It's vital to diversify asset classes, sectors, company size, and markets because it helps protect your portfolio when one particular investment is experiencing a down period. One of the simplest ways to achieve diversification is through mutual and index funds, and the core and satellite investing strategy aims to help you do so.

When deciding on the core holding for their portfolio, investors should go for a diverse large-cap stock fund, such as a low-cost S&P 500 index fund. The S&P 500 consists of the largest 500 U.S. companies, so they tend to drive the market. Historically, the S&P 500's annual return has been roughly 10%—a lucrative percentage for long-term investors.

A good percentage for your core holding in a moderate portfolio is generally 30–40%.

It's good to have a large-cap fund make up your core position because those are typically larger companies who have shown an ability to thrive through economic downturns and increase value over time. Like any stock, these companies experience price volatility, but if your focus is on the long-term, they provide the best stability and consistency.

After purchasing the large-cap core, different funds—the satellites—representing different fund categories will complete the core and satellite mutual fund portfolio structure. These other funds can include mid-cap stock, small-cap stock, foreign stock, fixed income (bonds), sector funds, gold, and money market funds.

These satellites are the funds that will help the investor, if successful in this strategy, to obtain higher returns than benchmarks like the S&P 500. At a minimum, and perhaps most importantly, the core and satellite portfolio construction design can help ensure investors are well-diversified among different asset types and mutual fund categories.

A mutual fund core and satellite portfolio may look like the following:

  • Large-cap fund: 40%
  • Mid-cap fund: 25%
  • Small-cap fund: 10%
  • International fund: 15%
  • Bonds: 5%
  • Cash: 5%

This asset allocation and investment makeup can also help the investor achieve reasonable returns for reasonable risk.

Benefits of Mutual Fund Core and Satellite Investing

The core and satellite approach comes with many advantages, including the following:

  • Stops investors from trying to pick "winning" stocks
  • Reduces management and commission fees
  • Gives investors greater portfolio diversification

For the average person, investing in funds is the best means to invest because it takes away the time and research often needed to pick quality individual stocks. Funds allow for one purchase to cover multiple investments. It's a win-win: You can get several investments without researching individual companies, and you achieve instant portfolio diversification.

With these fewer purchases comes lower commission costs because of the lower portfolio turnover. If you decide to invest in index funds, you can experience even lower costs because the management fees for index funds tend to be much less than actively traded funds.

Key Takeaways

  • The core and satellite benchmark investing strategy involves having a single mutual fund that makes up the bulk of your portfolio.
  • Satellite funds are smaller funds meant to complement your core mutual fund.
  • For moderate portfolios, the core position should make up roughly 30–40%.
  • Following a core and satellite investment strategy gives investors automatic diversification.