A core‑satellite portfolio lets long‑only mutual funds provide stability while SIFs sit in a smaller, high‑conviction “satellite” bucket aimed at tactical alpha.
Core‑satellite basics in simple terms
In a core‑satellite framework, most of your portfolio (often 60–80%) is the core: diversified, relatively stable holdings that track broad markets and compound steadily. The remaining 20–40% is the satellite: higher‑risk, higher‑flexibility strategies used for targeted growth or risk management around the core.
For Indian investors, core holdings are usually long‑only mutual funds like large‑cap, flexi‑cap and broad‑market index funds, while satellites include mid/small‑cap, sector/thematic funds, or alternatives. SIFs extend this idea by adding regulated long‑short and tactical strategies to the satellite bucket without moving into PMS/AIF ticket sizes.
Why SIFs fit the satellite role
SEBI designed SIFs to bridge the “missing middle” between simple mutual funds and high‑ticket PMS/AIFs, with strategies like long‑short equity, sector rotation and dynamic hybrid allocation. These funds can use derivatives and limited unhedged shorts (up to about 25% of net assets) to hedge, reduce net market exposure or express negative views, which is not available in plain long‑only funds.
Because of this flexibility and complexity, most SIFs carry higher risk than a broad‑market index or flexi‑cap mutual fund and are better used as satellites, not substitutes for the entire core. The ₹10 lakh minimum per PAN per AMC also means they are naturally aimed at mass‑affluent and HNI investors who can afford to keep their core in simpler products and allocate a smaller percentage to tactical ideas.
Designing the mutual fund core
A typical core for an Indian investor is built with long‑only mutual funds that:
- Are diversified across sectors and stocks.
- Have low to moderate costs and relatively predictable behaviour versus benchmarks.
Examples of core roles (conceptual, not scheme‑specific):
- A broad Nifty/Sensex index fund or low‑cost large‑cap fund as the foundation.
- A flexi‑cap or multi‑cap fund to add some mid‑cap growth while staying diversified.
This core is meant to carry the bulk of long‑term compounding and does not depend on timing or complex strategies to work. The idea is that even if satellites underperform or are rotated, the core keeps the overall plan anchored.
Using SIFs as tactical satellites
SIFs can then be layered on top as satellites to either enhance returns or manage risk in specific environments.
Conceptually, satellite roles for SIFs can include:
- Long‑short equity SIFs: Aim to reduce net market exposure and volatility by combining long positions in favoured stocks with short positions in weaker ones, within SEBI‑set limits.
- Sector‑rotation or thematic SIFs: Take focused bets on a limited number of sectors, with the ability to tactically increase or cut exposure, including limited shorts at sector level.
- Hybrid long‑short SIFs: Mix equity and debt with dynamic long‑short exposure, potentially smoothing returns versus a pure equity satellite.
Because satellites are a smaller slice of the portfolio, investors can tolerate more strategy risk there; knowing the core remains diversified and long‑only. At the same time, SIFs stay inside mutual‑fund regulations, offering more transparency than unregulated products.
Position sizing and risk awareness
In a conceptual core‑satellite layout, an investor might put 70–80% into core mutual funds and 20–30% into satellites, of which only a part is in SIFs. Within that satellite slice, SIF allocations can be sized based on risk tolerance, understanding that complex strategies and derivatives can mean larger drawdowns or behaviour that differs from the index.
Key risk‑awareness points when using SIFs as satellites:
- Strategy clarity: Read the SIF’s strategy and risk sections to understand whether it runs closer to market‑neutral, balanced or aggressive long‑short.
- Liquidity terms: Some SIFs are daily, others have interval structures or notice periods; satellites with lower liquidity should not be counted on for emergency cash needs.
- Correlation to core: The goal is often to add something that behaves differently from the core, but there can still be phases when both core and SIF satellites fall together.
Educational, not prescriptive
This core‑satellite approach is a framework, not a prescription to allocate specific percentages or to buy any particular SIF or mutual fund. It is meant to help investors conceptually separate:
- A long‑only mutual fund core for broad, long‑term growth.
- A SIF‑based satellite where more tactical, long‑short and sectoral ideas can live in a smaller, consciously risk‑accepted bucket.
Which exact funds, percentages or strategies are appropriate depends on each investor’s goals, risk capacity, tax situation and experience, and should be decided with the help of SEBI‑registered intermediaries.