Why Most Indians Fail at Diversification, How to Fix it in 2026

 

For a nation with 8 crore+ common support speculators and a booming value culture, you’d anticipate India to be a expansion victory story with one problem remains glaring Indians don’t diversify their portfolios properly.

According to industry estimates and AMFI data, nearly 98% of retail investors hold portfolios heavily bend toward a single asset usually FDs, gold, real estate, or a handful of stocks/mutual funds. But agreeing to most riches’ supervisors, over 80–90% of Indian portfolios are ineffectively diversified. The issue isn’t need of insights, it’s a blend of conduct, deception, and comfort bias. If you need way better risk-adjusted returns, less stuns, and more steady long-term riches, understanding why most Indians fail at diversification.

 

Overdependence on FDs and Savings Accounts

For decades, Indian households have relied on fixed deposits (FDs) and saving accounts as their primary form of investment. Even today, 50–60% of household financial wealth sits in FDs and cash-like instruments, making India one of the least diversified retail investor markets globally.

Why It Happens

 

The Real Problem is FDs are Losing to Inflation

While an FD may offer 6–7% interest, India’s average inflation rate hovers around 5–6%.
After taxes, especially for investors in the 20–30% tax bracket, real returns often turn flat or negative.

Example:
An FD at 6.5% interest, with 30% tax, delivers effective post-tax return is 4.55%
If inflation is 6%, the investor is losing purchasing power approximately 1.45% every year.

This silent erosion compounds over time, destroying long-term wealth the speculator ever taking note it.

Reinvestment Risk Makes It Worse

The returns of FDs are not locked for life only for the tenure. When the FD matures, rates may be lower, forcing reinvestment at unattractive yields. This is a major issue in falling interest rate cycles, where investors see their FD income decline with each renewal.

The Hidden Opportunity Cost

Money lying in FDs misses out on:

Over a 10–20-year horizon, this opportunity cost becomes massive.

This overdependence on FD creates:

Indians think they are investing safely, but in reality, they are investing sub-optimally.

 

Real Estate Obsession

For most middle-class Indian families, real estate is not just an asset class — it’s a symbol of stability, prestige, and generational security. This emotional and cultural attachment has resulted in property forming nearly 60–80% of household net worth, leaving very little room for financial assets.

Why Indians Overload on Real Estate

The Hidden Problems Behind Property Heavy Portfolios

  1. Illiquidity

Real estate is not a liquid asset. Selling can take months even years especially in Tier II and III cities with oversupply.
In a market downturn, sellers often have to settle for deep discounts.

This lack of liquidity makes it unsuitable for:

  1. Low Rental Yields (2–3%)

Contrary to the popular belief that property can be rented out for passive income, Indian rental yields remain in an extremely bad way low:

Compare this with financial assets:

Real estate’s yield often fails to even cover the interest cost of the home loan.

  1. High Leverage Risk

A large part of property buying in India is funded by home loans, which can run 15–25 years.
This creates:

When 40–50% of monthly income goes into EMIs, the ability to invest in equities, SIPs, gold, or global assets becomes severely restricted.

  1. Long Time Horizons

Real estate works but only over very long periods. Most housing markets witness:

For example, several pockets in major cities saw flat price growth between 2013–2022, even while equities tripled during the same period.

  1. Overconcentration is High Portfolio Risk

When 70–80% of wealth sits in one asset, any correction, legal dispute, project delay, or regulatory issue can severely impact financial stability. This creates an illusion of wealth, not true diversification.

Overconcentration results obsession with real estate leads to:

In short, property gives emotional comfort but rarely financial outperformance.

 

Buying ‘Popular’ Stocks Instead of Constructing Portfolios

A major reason Indian investors fail at diversification is that they often buy stocks, not portfolios. The rise of discount brokers, social media stock tips, finance influencers, and short-term trading culture has created a generation of first-time investors who follow trends, not strategy.

Instead of building a diversified, risk-adjusted portfolio, they end up buying one banking stock, IT stock, PSU stock trending on Instagram, stock a friend recommended, midcap “likely to explode”

This is not diversification it’s random collection.

Why New Investors Gravitate Toward ‘Popular’ Stocks

The False Sense of Diversification

Buying 8–10 different stocks feel like diversification but if they all belong to only two sectors, risk remains highly concentrated. Example from real markets Banking, NBFCs, Insurance, Fintech and PSU banks. All of these are still one sector financial services. Same with IT, SaaS, Digital services, Tech outsourcing still one broad sector technology. A downturn in any sector can crash the entire “portfolio” because the correlation is close to one.

How Concentration Risk Shows Up ?

When investors chase what is popular, their holdings tend to cluster around:

This means:

Examples:

No Asset Allocation No Risk Management

A proper portfolio involves:

Investors who only buy individual trending stocks miss:

This amplifies volatility and reduces consistency in returns resulted buying popular stocks leads to:

In short, new investors mistake variety for diversification. The number of stocks doesn’t matter the correlation between them does.

 

Confusing “Many Funds” With “Diversification”

A very common mistake among Indian investors is believing that holding a large number of mutual funds automatically means they are diversified. In reality, owning 8–10 funds from the same category is not diversification it’s simply duplication.

For example:

This may look like a diversified mutual fund portfolio. But underneath the surface, the underlying holdings are often 90–95% the same.

Why Investors End Up with Too Many Funds

Over time, portfolios turn into a messy collection of overlapping equity exposure. The Illusion of Diversification, Different fund names create a psychological illusion:

But behind the scenes, they often hold HDFC Bank, Reliance Industries, Infosys, ICICI Bank, TCS and Bharti Airtel in almost the same proportions. Owning multiple funds in the same category doesn’t reduce risk it simply multiplies the same exposure.

The Problem is Hidden Concentration, even if an investor holds many funds, the underlying exposure may be:

This creates hidden concentration risk the exact opposite of diversification, during a market correction in any major sector:

More funds mean more Overlap, Complexity, Paperwork, Expense ratios, Monitoring effort. Yet, returns do not improve.

In fact, studies show that beyond 4–5 well-chosen funds, performance starts to flatten while complexity rises.

The Right Approach Fewer, Sharper, Diversified Funds

Instead of owning 8–10 similar funds, a smarter diversification structure looks like this:

  1. One Large-cap Fund for stability and blue-chip exposure.
  2. One Flexi-cap or Multi-cap Fund for dynamic allocation across market caps.
  3. One Midcap or Smallcap Fund for long-term alpha generation.
  4. One Debt Fund Category for stability and emergency liquidity.
  5. Optional: Sectoral, International, or Factor Funds

Advanced diversification ensures exposure to:

Confusing “many funds” with “diversification” leads to:

True diversification means spreading risk across different asset classes, and sectors, not just accumulating more schemes.

 

Underestimating Global Exposure

Despite India’s growing participation in global markets, less than 1% of Indian retail investors have any exposure outside India. This lack of international allocation leaves portfolios heavily dependent on the performance of a single economy and a single currency.

In an interconnected world, this is a major diversification blind spot.

Why Indians Ignore Global Investments

The result is portfolios that are unintentionally overexposed to India’s economy and currency cycles.

 

The Real Problem is No Hedge Against INR Depreciation

In the past quarter-century, the Indian rupee has consistently lost value when compared to the US dollar.

This means:

If your wealth grows in rupees but the rupee weakens every year, your global buying power shrinks, international investing is not just about returns it is a currency hedge.

 

Shielding from Domestic Declines
India presents a compelling narrative for long term growth, yet no nation excels in every single year, economic contractions occur because of:

During these periods, global assets especially the US markets often act as stabilizers. Historically

This is true diversification: assets that perform differently across cycles.

 

Missing Out on Global Growth Themes

Some of the world’s most valuable companies are not listed in India:

Indian investors with purely domestic portfolios simply miss these megatrends.

No matter how strong India becomes, global innovation will not be confined to one market.

 

Ignoring the Power of Global ETFs & Index Funds

At present, achieving global diversification is straightforward:

US index funds / Funds of Funds (S&P 500, Nasdaq 100)

However, knowledge is still limited, and involvement is also minimal.

Underestimating global exposure leads to:

True diversification requires geographical diversification — not just more Indian assets.

In last a well-diversified portfolio is not about owning “many investments”.
It’s about owning uncorrelated assets that behave differently during market cycles.

In 2025, the smartest Indian portfolios will be:
✔ equity-driven for growth
✔ debt-anchored for stability
✔ gold-hedged for protection
✔ globally diversified for currency resilience

Fixing diversification is the single most impactful thing Indian investors can do starting today.

 

 

Disclaimer: The opinions and investment advice provided by Finaffair experts are their own and do not reflect the views of the website or its management.Finaffair encourages users to consult qualified professionals before making any investment decisions.

 

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