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, time-tested portfolio design that's made up of a core investment and other satellite funds that complement it. Like many of the best strategies, core and satellite is simple and effective for long-term, buy-and-hold investing.

What Is Mutual Fund Core and Satellite Investing?

Core and satellite is a portfolio design that contains a core asset, such as a large-cap index fund. The core asset makes up the largest portion of the portfolio. Smaller funds, known as satellite funds, add up to create the whole.

The objective of this design 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.

How Core and Satellite Investing Works

One of the first things new investors learn about is the value of diversification. It's vital to asset classes, sectors, and markets. It helps to protect you when one investment is going through a down period. One of the simplest ways to achieve it is through mutual and index funds. The core and satellite strategy aims to help you do so.

Your Core Holding

Go for a diverse large-cap stock fund, such as a low-cost S&P 500 index fund, when you're deciding on your core holding. The S&P 500 consists of the largest 500 U.S. companies. They tend to drive the market. The S&P 500's annual return has been roughly 15% over time—a nice percentage for long-term investors.

A good percentage for your core holding in a moderate portfolio is often from 30 to 40%.

It's good to have a large-cap fund make up your core position. These are often larger companies that have shown that they're able to thrive through economic downturns. They increase their value over time. There can be price volatility, like with any stock. But they provide the best stability and consistency if your focus is on the long term.

Your Satellite Holdings

Your satellites represent fund categories that will complete the core and satellite structure. These other funds can include mid-cap stocks, small-cap stocks, foreign stocks, fixed income bonds, sector funds, gold, and money market funds. These are the funds that will help you obtain higher returns than benchmarks like the S&P 500. The core and satellite design can help ensure that you're well diversified among asset types and fund categories.

A mutual fund core and satellite portfolio may be made up of one large-cap fund at 40%, a mid-cap fund at 25%, a small-cap fund at 10%, and an international fund at 15%, with bonds taking up 5% and cash taking up 5%. This asset makeup can also help you achieve reasonable returns for reasonable risk.

Benefits of Core and Satellite Investing

The core and satellite approach comes with many advantages. It stops you from trying to pick "winning" stocks. It lessens management and commission fees. It gives you greater diversification.

Funds are the best means to invest for most people. They take away from the time and research that's often needed to pick good individual stocks. Funds allow for one purchase to cover multiple investments. It's a win-win. You can get many investments without looking into individual companies. You achieve instant diversification.

Lower commission costs result from fewer purchases because of the lower turnover. You can have even lower costs if you decide to invest in index funds. The management fees for these tend to be much less than those for funds that are actively traded.

Key Takeaways

  • The core and satellite 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.
  • The core position should make up roughly 30 to 40% of a moderate portfolio.
  • Following a core and satellite strategy gives you automatic diversification.

NOTE: The Balance doesn't provide tax or investment services or advice. This information does not take into account the objectives, risk tolerance, or financial circumstances of any one investor.
It might not be right for all investors. Investing involves risk, including the loss of principal.