Concentrated vs Diversified Portfolio
The concentrated versus diversified portfolio debate centres on whether holding a small number of high-conviction positions (10-20 stocks) generates better risk-adjusted returns than a broadly diversified portfolio (50-100+ stocks), with evidence and practitioners firmly split on both sides.
Warren Buffett's famous observation that diversification is protection against ignorance — that it makes little sense for those who know what they are doing — captures the concentrated camp's argument. The logic is that deep fundamental research on a small number of high-quality businesses, held with patience, generates superior returns because the manager's best ideas are not diluted by mediocre selections made to fill out a 100-stock portfolio.
In India, the focused fund category regulated by SEBI formalises this philosophy. SEBI defines a focused mutual fund as one holding no more than 30 stocks. The concentrated focus is meant to allow fund managers to deploy their best research into a limited set of high-conviction positions. Focused funds in India have produced a wide dispersion of outcomes — some have significantly outperformed diversified large-cap funds, while others have suffered concentrated drawdowns when one or two large positions encountered problems (YES Bank positions in multiple focused funds during 2018-2020 being a cautionary example).
The diversified camp draws on two complementary arguments. First, systematic evidence from fund performance databases suggests that most active managers — regardless of style — do not consistently beat passive indices over 10-year periods after fees and taxes. If stock-picking skill is not reliably persistent, concentration adds tracking error without adding return. Second, idiosyncratic risk — company-specific events like accounting fraud, regulatory action, or management failure — is diversifiable and therefore unrewarded. Holding 5% in a single stock that turns out to be a fraud is catastrophic; holding 0.5% makes the event survivable.
Position sizing discipline is the bridge between the two approaches. A genuinely high-conviction position in a concentrated portfolio is sized at 5-10% with explicit risk parameters — the position is reduced or exited if the original thesis is invalidated, not held indefinitely. In practice, concentrated portfolios often become inadvertently concentrated when one position performs well and its weight grows without deliberate rebalancing, creating unintended concentration rather than the disciplined kind.
For individual investors building their own equity portfolios, the practical consensus among SEBI-registered investment advisers is that 20-25 carefully selected stocks across sectors provides 85-90% of the diversification benefit of a 100-stock portfolio, while preserving enough focus for genuine research quality. Beyond 30-35 stocks, the marginal diversification benefit diminishes rapidly while portfolio management complexity grows linearly.