When equity markets rally, portfolios with concentrated bets often look like winners.
Investors in stocks like Gensol Engineering or Mazagon Dock in 2023 may have flaunted triple-digit returns. But beneath that temporary high lies a quiet but dangerous threat: concentration risk.
Concentration risk refers to excessive exposure to a single stock, sector, or strategy. While it can magnify gains, it also amplifies losses when things go wrong.
In a country where stock investing is now mainstream and mutual funds manage over ₹55 lakh crore (as of April 2025), this risk often goes unnoticed—until the tide turns.
Also read: Devina Mehra: Diversified or concentrated portfolio? It’s an easy choice
The temptation of overconfidence
In recent years, retail investors in India have been shifting away from diversified mutual funds and toward direct stock picking. Fuelled by Finfluencers, demat apps, and FOMO, many investors now chase recent winners highlighted under “top gainers in 1 year” filters.
The pattern is familiar: someone sees a stock that has returned 300% over 18 months and bets big, assuming the past will repeat.
But markets are rarely so kind.
The Gensol lesson
Take Gensol Engineering. The stock soared over 200% in 2023. But by early 2024, after reports of financial irregularities and broader corrections, it plunged nearly 30% in just weeks. For those who had 40–50% of their portfolio in Gensol, the damage was severe—even though broader indices were stable.
Data speaks: The price of concentration
According to the CFA Institute, a well-diversified portfolio needs at least 20–25 uncorrelated stocks. In India, mutual funds typically hold 40–60 stocks. Yet many DIY investors own just 5–8 stocks—often clustered around themes like capital goods, defence, or small caps.
The difference isn’t theoretical—it’s the line between staying invested and panic selling during volatility.
Diversification vs. diworsification
Many investors argue that too much diversification dilutes returns. It’s true—diversification doesn’t guarantee the highest return, but it protects against catastrophic loss.
Also read: Diversification isn’t about how many stocks or funds you own—it’s about which ones
Let’s say you own five stocks. If one stock crashes 80%, and it made up 40% of your portfolio, your entire wealth drops by 32%—even if the rest stay flat. A diversified fund with the same stock at 3% allocation would suffer less than 2.5% impact.
Think of diversification like a cricket team. You might have Virat Kohli, but if the other 10 are debutants, your tournament odds shrink. A steady, well-balanced lineup gives you better consistency—even if a star underperforms.
Mutual Funds: The diversification you forgot
In chasing alpha, many investors have abandoned mutual funds—especially actively managed ones. But mutual funds offer built-in benefits: diversification, professional management, risk-adjusted returns, and regulatory safeguards.
Some points to consider:
- Most top-performing equity mutual funds hold less than 8% in any single stock.
- Balanced advantage and multi-asset funds spread risk across equities, debt, and gold.
- Fund managers handle tax-efficient rebalancing and emotional discipline, avoiding behavioural traps like anchoring or overconfidence.
Instead of ditching mutual funds completely, consider a blend. For instance, a 70-30 split between diversified funds and direct equity can offer growth with a cushion.
10/10/10 rule for safer investing
To control concentration risk, follow the 10/10/10 rule:
- No more than 10% of your portfolio in one stock
- No more than 10% in one sector (especially cyclical)
- No more than 10% portfolio change without reviewing overall allocation
Review your SIPs, holdings, and direct investments every six months. If one idea has grown disproportionately, consider trimming it.
Final thought
In investing, silent risks are often deadlier than visible ones. Concentration risk doesn’t show up in daily NAVs or dashboards—it shows up in sleepless nights during market corrections. A portfolio should not just perform in bull runs; it should survive the bear phases.
As markets evolve and choices multiply, managing risk is not just about avoiding losses—it’s about staying in the game. And for that, diversification isn’t optional. It’s essential.
Also read: Unlocking global markets: How Indian investors can diversify with portfolio management services
Viral Bhatt, founder, Money Mantra— a personal finance consultancy