When fairness markets rally, portfolios with concentrated bets usually seem like winners.
Buyers in shares like Gensol Engineering or Mazagon Dock in 2023 could have flaunted triple-digit returns. However beneath that momentary excessive lies a quiet however harmful risk: focus threat.
Focus threat refers to extreme publicity to a single inventory, sector, or technique. Whereas it may possibly enlarge beneficial properties, it additionally amplifies losses when issues go flawed.
In a rustic the place inventory investing is now mainstream and mutual funds handle over ₹55 lakh crore (as of April 2025), this threat usually goes unnoticed—till the tide turns.
Additionally learn: Devina Mehra: Diversified or concentrated portfolio? It’s an easy choice
The temptation of overconfidence
In recent times, retail traders in India have been shifting away from diversified mutual funds and towards direct inventory choosing. Fuelled by Finfluencers, demat apps, and FOMO, many traders now chase latest winners highlighted beneath “high gainers in 1 yr” filters.
The sample is acquainted: somebody sees a inventory that has returned 300% over 18 months and bets large, assuming the previous will repeat.
However markets are hardly ever so sort.
The Gensol lesson
Take Gensol Engineering. The inventory soared over 200% in 2023. However by early 2024, after reviews of economic irregularities and broader corrections, it plunged practically 30% in simply weeks. For many who had 40–50% of their portfolio in Gensol, the harm was extreme—although broader indices have been steady.
Knowledge speaks: The worth of focus
In response to the CFA Institute, a well-diversified portfolio wants at the very least 20–25 uncorrelated shares. In India, mutual funds sometimes maintain 40–60 shares. But many DIY traders personal simply 5–8 shares—usually clustered round themes like capital items, defence, or small caps.
The distinction isn’t theoretical—it’s the road between staying invested and panic promoting throughout volatility.
Diversification vs. diworsification
Many traders argue that an excessive amount of diversification dilutes returns. It’s true—diversification doesn’t assure the very best return, but it surely protects towards catastrophic loss.
Additionally learn: Diversification isn’t about how many stocks or funds you own—it’s about which ones
Let’s say you personal 5 shares. If one inventory crashes 80%, and it made up 40% of your portfolio, your whole wealth drops by 32%—even when the remainder keep flat. A diversified fund with the identical inventory at 3% allocation would endure lower than 2.5% impression.
Consider diversification like a cricket crew. You might need Virat Kohli, but when the opposite 10 are debutants, your event odds shrink. A gentle, well-balanced lineup provides you higher consistency—even when a star underperforms.
Mutual Funds: The diversification you forgot
In chasing alpha, many traders have deserted mutual funds—particularly actively managed ones. However mutual funds supply built-in advantages: diversification, skilled administration, risk-adjusted returns, and regulatory safeguards.
Some factors to think about:
- Most top-performing fairness mutual funds maintain lower than 8% in any single inventory.
- Balanced benefit and multi-asset funds unfold threat throughout equities, debt, and gold.
- Fund managers deal with tax-efficient rebalancing and emotional self-discipline, avoiding behavioural traps like anchoring or overconfidence.
As a substitute of ditching mutual funds fully, take into account a mix. For example, a 70-30 break up between diversified funds and direct fairness can supply progress with a cushion.
10/10/10 rule for safer investing
To regulate focus threat, comply with the ten/10/10 rule:
- Not more than 10% of your portfolio in a single inventory
- Not more than 10% in a single sector (particularly cyclical)
- Not more than 10% portfolio change with out reviewing general allocation
Overview your SIPs, holdings, and direct investments each six months. If one thought has grown disproportionately, take into account trimming it.
Closing thought
In investing, silent dangers are sometimes deadlier than seen ones. Focus threat doesn’t present up in day by day NAVs or dashboards—it exhibits up in sleepless nights throughout market corrections. A portfolio mustn’t simply carry out in bull runs; it ought to survive the bear phases.
As markets evolve and decisions multiply, managing threat isn’t just about avoiding losses—it’s about staying within the recreation. And for that, diversification isn’t optionally available. It’s important.
Additionally learn: Unlocking global markets: How Indian investors can diversify with portfolio management services
Viral Bhatt, founder, Cash Mantra— a private finance consultancy
