February 2, 2026
If you ask most investors what they expect from the market, the answer is simple: decent returns without too many sleepless nights.
And almost everyone has heard the same advice for diversifying their investments.
At first glance that sounds smart. But the way diversification is usually done can quietly work against you.
There’s a word for it: Diworsification.
In this editorial I will explain to you the pitfall of diworsification in simple language.
Why asset allocation is important
Asset allocation is just a fancy way of saying, “How do I allocate my money?”
It means deciding how much to invest in stocks, debt, cash, real estate, gold, etc.
Within equity it is about how much should be put into large, medium and small companies. In real estate, the discussion can be between land, commercial or residential real estate.
This decision is more important than most people realize. In fact, asset allocation determines the majority of the long-term performance of most portfolios… much more than choosing the perfect fund or stock.
A good mapping does three useful things:
- It helps to keep risks under control
- The goal is to smooth returns across market cycles
- It helps you stay calm when the markets become volatile
Without a clear plan, investors tend to chase what is currently doing well. That usually leads to investors buying high and selling low in the stock market.
But it doesn’t have to be this way.
Let’s look at how mutual funds can help with your asset allocation, especially into assets other than real estate and land.
One size does not fit all
Asset association is essential not only because investors have different risk appetites, but also because every financial goal has its own time horizon.
A goal that is five years away, such as buying a house, is very different from a goal that is twenty years away, such as retirement. Different goals cannot be financed with the same mix of assets.
Long-term goals – retirement or creating legacies – can allow for a higher allocation to growth assets such as stocks. This is because a long time horizon allows investors to weather short-term volatility and benefit from compound interest.
In contrast, goals with a shorter time horizon – a home purchase, children’s education or a planned business investment – require a more conservative mix, with a greater emphasis on debt and liquid instruments to help protect capital and reduce timing risk.
Importantly, this should be true even within an investor’s overall long-term asset allocation sub-allocations tailored to specific objectives.
This is to ensure that money intended for short-term needs is not exposed to excessive market risk and that capital intended for distant purposes is not kept too conservative and deprived of growth.
Asset allocation should be targeted and not one-size-fits-all
Aligning each goal with the right time horizon and asset mix increases the likelihood that the objectives will be achieved.
It doesn’t force investors to compromise long-term growth for short-term security, or vice versa.
Why investment funds are one of the suitable solutions
Mutual funds make asset allocation easy. You don’t have to study balance sheets or follow markets every day. Fund managers do the hard work for you.
Most investors spread their stock money across popular categories such as:
- Large hood
- Center cap
- Small capitalization
- Flexi cap
- Multi cap
On paper this seems sensible. Different categories, different styles, different risks. So far, so good.
The problem starts with the way funds are chosen.
A very common portfolio of Rs 1,000,000
Let’s look at an example.
An investor decides to invest Rs 1,000,000 in equity funds. They choose the two funds in each of five categories, based on popular websites and rankings.
They invest Rs 100,000 in each fund. That’s a total of 10 funds.
At first glance, this seems like a solid plan. Ten funds. Five categories. Lots of diversification. What can go wrong?
A lot, actually.
What the wallet really looks like
When you combine the assets of these ten funds, the investor ultimately becomes the owner 703 shares in total.
That sounds impressive. But here’s the catch.
Many of these stocks are replicated in different funds. Once the overlaps are removed, so is the portfolio 387 unique shares.
So the investor doesn’t really get 703 different ideas. They get the same popular names over and over again, just packaged in different funds.
This creates the illusion of diversification without the real benefits.
The problem no one is talking about: small businesses
Here’s where it gets even more interesting.
Out of 703 stock positions 371 shares have a weight of less than 1% in the total portfolio.
Think about that for a moment.
Even if one of these stocks did double in pricethe impact on your portfolio would hardly be noticeable. The benefit sounds exciting, but the math is brutal.
Ultimately, you own a lot of potential winners, but in quantities too small to matter.
Please note that the above explanation is for understanding purposes only.
How diworsification works against you
Most investors don’t plan to overcomplicate their portfolios. It just happens.
- They choose the best rated funds from popular websites
- They invest in different categories for comfort
- They add more money to avoid regret
The portfolio slowly fills with overlapping positions and small positions.
Rather than reducing risk, this approach often produces average returns, with additional paperwork and monitoring.
A simpler way to think about diversification
True diversification is not about owning everything. It’s about owning the right mix of assets of significant size.
Fewer funds, clear roles and controlled overlap often work better than a long list of funds.
What really matters is this:
- Ensure good asset allocation
- Limitation of the number of funds
- Knowing what you really own
Complexity rarely adds value to investing.
Final thoughts
Most investors invest in the best-known mutual funds across many categories, hoping for safety and balance.
What they often end up with is an overcrowded portfolio, hundreds of stocks and many positions that don’t move the needle.
That’s not smart diversification. That is aggravation.
When investing, clarity takes precedence over quantity. Simplicity usually wins over time.
Invest smartly.
Disclaimer: The views expressed herein constitute opinions only and do not constitute guidelines, advice or recommendations as to any course of action to be followed by the reader. This information is for general reading and educational purposes only and is not intended as a professional guide to readers. This should not be construed as a guideline or recommendation to buy or sell any sector or stock.
Readers should exercise due care and caution and, if necessary, seek professional advice before making any investment decision. Investments in mutual funds are subject to market risks. Please read all fund related documents carefully before investing.
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