Personal Finance

Capture your short-term gains

B Venkatesh | Updated on January 07, 2019 Published on January 06, 2019

Goal-based portfolios are good, but satellite portfolios are just as important

Creating a satellite portfolio is just as important as setting up a goal-based portfolio. In this article, we discuss why a satellite portfolio is an essential part of your total investments. We also show how you can create such a portfolio.

Bridging gaps

You should set up a satellite portfolio to capture short-term gains primarily in equity and commodities markets. While the time horizon for such a portfolio is typically less than three months, you should not hesitate to hold your position longer.

To appreciate the relevance of a satellite portfolio, picture a world where you have only goal-based portfolios. What if the stock market rises 40 per cent in three years only to decline 30 per cent in the fourth year? Your core portfolio would have lost all its unrealised gains. Why? When you create a goal-based portfolio, you determine your required return — called the minimum acceptable return (MAR) — based on the amount of savings and the time horizon for your life goal.

Typically, MAR is based on pre-tax expected return of 12 per cent on equity and 7 per cent on bonds, with appropriate tax rates. Importantly, MAR is a compound annual return. This means you have to leave the pre-tax unrealised annual gains of 12 per cent in your portfolio.

If you take profits and reinvest the proceeds in bonds, you will earn a lower return than your MAR. And that could lead to failure of your life goals.

Now, back to our example. If your investment earns 40 per cent in three years, you have earned unrealised compound annual returns of 12 per cent, which is also your expected return. So, you have to keep all your unrealised gains in the portfolio to compound the next year. But the market declined 30 per cent in the fourth year, wiping out all the unrealised gains. This means you have lost three years of MAR, which your portfolio has to catch up in the remaining years to meet your goal. That is, indeed, a difficult task.

This is where your satellite portfolio comes handy, as it is geared towards capturing asset price movements in volatile markets. Needless to say, the gains you make in this portfolio can be used to bridge any value-gap in your core portfolio.

Satellite management

You can also use the gains from the satellite portfolio for non-budgeted discretionary spending such as unplanned vacations or buying luxury products. Then, there is the behavioural factor. You get the excitement and the satisfaction of timing the market.

Suppose you buy a stock at 100 and sell it at 160. You feel happy that you made 60 per cent return on your trade. Your happiness is even more when the stock you sold subsequently declines.

Of course, you will also have your fair share of regrets. But that is the trade-off.

You should use technical analysis to time your trades in your satellite portfolio. If you do not know how to read the charts, you can buy professional research reports till you learn technical analysis.

Planning your own trades can be more exciting than acting on someone else’s advice.

Also, it is behaviourally optimal to attempt and fail (at technical analysis) than not try at all.

Your satellite portfolio should not be more than 40 per cent of your total investment portfolio. That is, if your total investment is worth ₹50 lakh, your goal-based portfolio should be at least ₹30 lakh and your satellite portfolio not more than ₹20 lakh. This rule ensures that you do not become a compulsive trader at the expense of sacrificing your life goals.

You must, therefore, take profits and invest in bank deposits when your satellite portfolio’s allocation is more than 40 per cent.

This also enables you to create necessary buffer capital for your goal-based portfolio.

The writer is founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in

Published on January 06, 2019

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.