A lot of Indian retail investors today are big on mutual funds and ETFs. SIPs are easy to set up, the process feels smooth, and there’s a sense of comfort in following a structured investment plan.
Investors also diversify within mutual funds — a bit of large-cap here, some small-cap there, maybe a mid-cap or sector fund too. Plus, they often add some of their own handpicked stocks, thinking it adds another layer of diversification. On the surface, it feels like a well-thought-out, balanced portfolio.
The Diversification Illusion
When markets are going up, these investments often move differently. Some rally harder, others lag a bit, creating the illusion of balance and diversification.
But here’s the thing:
In bull markets, everything seems uncorrelated and diversified. In bear markets, correlations go to one at terminal velocity.
When a proper market sell-off hits, it doesn’t matter whether you hold large-cap, small-cap, sector funds, or your favorite stock picks — they all tend to fall together. That’s because, at the end of the day, they’re just different flavors of the same asset class: Indian equities.
What Real Diversification Looks Like
If you want your portfolio to weather all kinds of market conditions — not just bull runs — you need to think beyond Indian equities.
Think international markets, bonds, gold, real estate, commodities, crypto etc. These asset classes don’t always move in the same direction, which helps smooth out your portfolio’s performance when things get rough.
Real diversification comes from mixing asset classes, not just mixing fund names.