Concentration vs. Diversification in PMS: What Every Investor Should Know
One of the most important decisions in a Portfolio Management Service (PMS) is how concentrated or diversified the portfolio should be.
A concentrated portfolio typically holds a smaller number of high-conviction stocks. If the portfolio manager's investment ideas are correct, returns can be significantly higher. However, concentration also increases the impact of any single stock performing poorly, making the portfolio more volatile.
A diversified portfolio spreads investments across a larger number of stocks, sectors, or themes. This helps reduce company-specific risk and provides greater stability, although it may limit the upside from the best-performing investments.
A Simple Illustration
Portfolio A: 12 carefully selected stocks with about 8–10% allocation each.
Portfolio B: 40 stocks with about 2–3% allocation each.
If one stock declines by 20%, Portfolio A experiences a much larger impact than Portfolio B. Conversely, if one stock doubles in value, Portfolio A benefits more from that success.
There is no universal "best" approach. The right balance depends on your investment objectives, risk appetite, and confidence in the portfolio manager's investment process. Rather than focusing only on the number of stocks, investors should evaluate whether the portfolio's level of concentration aligns with its strategy, risk management framework, and long-term investment philosophy.
For more information, keep exploring our website for the Risght PMS framework and your risk profile for ideal investment approach for your long term wealth creation.
Disclaimer: Investment in securities market is subject to market risks. Please consult a SEBI registered Investment Adviser or APRN registered PMS Distributor(s) before making any investment decisions.