If you are married, we have two questions for you. One, do you discuss how to channel your family’s savings with your spouse? And two, do you and your spouse have separate portfolios? In this article, we discuss why it pays to have a single portfolio, even if your risk attitude is different from that of your spouse.
Core-satellite framework
Your risk tolerance may be lower than that of your spouse. And because it is not easy to reconcile differences in risk attitude, it is tempting to have two portfolios to channel your family savings. So, why then are we suggesting that your family have a single investment portfolio? The answer lies in the core-satellite framework.
The core portfolio typically follows a buy-and-hold approach, where you hold your investments till the end of your investment horizon. If you are planning to retire 25 years hence, your core portfolio will contain investments that you will typically liquidate 25 years later. The satellite portfolio, on the other hand, is geared to take advantage of short-term price fluctuations typically in the equity and the commodity markets.
It is moot as to which is riskier, the core or the satellite! But it is typical in a family for a spouse to embrace short-term fluctuations while his or her partner to be uncomfortable with such price movements. If you and your spouse have such differences, the core-satellite framework will help you map your risk attitudes through a single master portfolio.
But why should you adopt the core-satellite framework? One, it lowers the fees you incur on your investments because of the type of mutual funds that the core portfolio will hold. And two, it balances long-term goals with short-term profit opportunities, the core being long-term and the satellite being short-term investments.
Creating single portfolio
The core portfolio typically contains index funds and bank fixed deposits. The satellite portfolio, on the other hand, typically contains direct stock investments, commodity investments and derivatives. The portfolio composition suggests that the core is more conservative than the satellite.
So, rather than have two separate investment accounts, you can map your risk attitude and that of your spouse’s to each of the two sub-portfolios! If you are the conservative of the two, your savings can be earmarked to the core portfolio while your spouse can contribute to the satellite portfolio.
You should adopt the following steps to manage a single portfolio: First, set-up a joint bank account into which you and your spouse transfer your savings every month from your respective salary accounts. You also need two demat accounts for this purpose- one for investments in the core portfolio and other, for investments in the satellite portfolio.
Second, decide on the allocation between the core and the satellite portfolios. You also have to decide how much to invest in equity, bonds and commodities. You and your spouse may, for instance, decide to invest a total of 50 per cent in equity, of which 20 per cent could be in the satellite portfolio.
Third, set up monthly SIPs from the joint bank account to pre-selected mutual funds. The choice of products should be suited to your (and your spouse’s) risk attitude and yet be aligned to the family’s investment objectives.
Conclusion
It is possible that either yours or your spouse’s savings is not enough to contribute entirely to the core or the satellite portfolio. You may, for instance, save Rs 25,000, whereas the core portfolio to which your risk attitude is mapped requires a contribution of Rs 30,000 every month. The benefit of managing a single investment portfolio mapped to both your risk attitudes is, however, not lost even if yours or spouse’s savings does not exactly match the monthly contribution to the core or the satellite portfolio.
( The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to knowledge@thehindu.co.in )