Concentration in an investment portfolio can lead to significant wealth creation by allowing an investor to capitalize on their best ideas or insights into specific companies or sectors.
By focusing resources on a few high-conviction investments, like Rakesh Jhunjhunwala did with Titan or Warren Buffett with Coca-Cola, investors can benefit from outsized returns when those investments perform well.
However, this strategy also amplifies risk, as the portfolio's performance becomes closely tied to the fate of a handful of holdings. It demands deep knowledge, patience, and a high tolerance for volatility, highlighting the delicate balance between potential reward and inherent risk.
I recently discussed this aspect with Amey Kulkarni of Candor Investing - Can one allocate 50% of the portfolio to a single stock?
I think it needs a special kind of understanding, conviction and courage to be able to do this. But let's see what Amey has to say. See the video below or click here.
But then there are Mutual Funds - as diversified as they can be:
A index fund based on Nifty 50 has 50 stocks - with the largest holding around 12 to 15%.
A Nifty Midcap 150 as the name suggests has 150 stocks.
The focused fund category in actively managed funds limit their exposure to 30 stocks as per SEBI mandate.
Parag Parikh Flexi cap fund holds about 25 to 30 stocks.
Can you allocate a large portion of your money to a single fund?
Well, if we are clear as to what we want to achieve with our fund - it is okay to have a large allocation to a single fund. I do it.
In fact, those who rely on on passive index funds can end up allocating almost all of their money to a single index fund such as those based on Nifty 50 or Nifty Next 50.
So, concentration or diversification?
As many investors say, diversification is our best bet against uncertainty and ignorance. Diversification brings stability, balance and less 'moments of terror'.
Concentration, on the other hand, is a different roller coaster. You have to be very, very careful while choosing to use that in your portfolio.
What does your investment portfolio have?
