Published May 26, 2026 4 Min Read

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Introduction

Concentration risk happens when your portfolio depends too much on a single investment, sector, or asset class. This can increase portfolio concentration risk because one market event may affect a large part of your investment value.

  • Concentration risk in mutual funds is a type of unsystematic risk that affects specific sectors, companies, or themes.
  • Diversification helps reduce concentration risk by spreading investments across different asset classes and fund categories.
  • SEBI requires mutual funds to display a colour-coded riskometer: Low, Low to Moderate, Moderate, Moderately High, High, or Very High.
  • Investors can choose from 4,000+ mutual fund schemes on the Bajaj Broking website across equity, debt, hybrid, ELSS, and thematic categories.
  • SIP investments start from Rs. 100 per month on the Bajaj Broking website.
  • KYC is mandatory before investing in any mutual fund scheme as per SEBI regulations.

You can start investing through the Bajaj Broking website after completing KYC online, compare different mutual fund categories, and begin a SIP from Rs. 100 per month.

What is concentration risk?


Concentration risk means a large part of your money is invested in one area. This may be one company, one sector, one asset class, or one mutual fund category.

If that investment performs badly, your portfolio may face bigger losses. This is why concentration risk meaning is closely linked to lack of diversification.

For example, if most of your money is invested in technology sector funds, a fall in technology stocks may reduce your portfolio value sharply. A diversified portfolio spreads risk across different investments.

Why does concentration risk matter?

Concentration risk can increase volatility in your portfolio. Volatility means frequent or sharp changes in investment value.

Mutual fund returns are market-linked and not guaranteed. SEBI also requires all schemes to display a riskometer showing the scheme’s risk level.

Riskometer levelMeaning
LowLower market fluctuation risk
Low to ModerateModerate stability with some risk
ModerateBalanced risk level
Moderately HighHigher market-linked fluctuations
HighSignificant volatility possible
Very HighHighest market risk exposure

Which types of concentration risk should you know?


Different types of concentration risk can affect your portfolio in different ways. Understanding them may help you build better diversification.

Type of concentration riskWhat it meansExample
Sector concentrationToo much exposure to one industryInvesting mostly in banking funds
Company concentrationLarge exposure to one companyHolding many stocks of one company
Geographic concentrationInvestments focused on one country or regionInvesting only in Indian equities
Asset class concentrationInvesting mainly in one asset classHolding only equity funds
Theme concentrationExposure to one investment themeInvesting only in EV or AI funds

Sector concentration risk

Sector concentration risk happens when too much money is invested in one industry. A slowdown in that industry can affect the entire portfolio.

For example, an oil price shock may affect energy sector funds. Similarly, policy changes may affect banking or infrastructure funds.

Asset class concentration risk

Asset class concentration risk happens when your portfolio lacks balance. Investing only in equity funds may increase volatility during market corrections.

Diversification across equity, debt, and hybrid mutual funds may help reduce overall portfolio concentration risk.

How does concentration risk affect your portfolio?


Portfolio concentration risk can increase losses during market declines. A portfolio with limited diversification may react sharply to negative events.

For example, if you invest only in small-cap funds, market volatility may affect your portfolio more compared to a diversified mix of large-cap, debt, and hybrid funds.

Common effects of concentration risk

  • Higher portfolio volatility
  • Greater exposure to sector-specific losses
  • Reduced portfolio stability
  • Larger short-term drawdowns
  • Increased unsystematic risk

Concentration risk vs diversification

FactorConcentration riskDiversification
Investment spreadLimitedWider
Risk exposureHigherLower
Portfolio stabilityLowerHigher
Loss impactLargerMore balanced
Suitable forAggressive strategiesLong-term balanced investing

Diversification does not remove market risk completely. However, it may help reduce the effect of unsystematic risk linked to specific sectors or companies.

How do you measure and reduce concentration risk?


You can reduce concentration risk by spreading investments across multiple fund categories, sectors, and asset classes. The process can help improve portfolio balance over time.

How to measure concentration risk

  1. Review your portfolio allocation across equity, debt, hybrid, and thematic funds.
  2. Check whether one sector or fund category exceeds a large share of your total portfolio.
  3. Compare your holdings with the SEBI riskometer levels of each mutual fund scheme.
  4. Track overlapping investments across multiple mutual funds using portfolio statements.

How to reduce concentration risk

  1. Diversify investments across large-cap, mid-cap, small-cap, debt, and hybrid categories.
  2. Start SIP investments from Rs. 100 per month to invest gradually over time.
  3. Rebalance your portfolio regularly based on financial goals and risk tolerance.
  4. Avoid allocating most of your money to one sector, theme, or company.
  5. Use the Dashboard, Portfolio, Orders, and MF Profile tools available on the Bajaj Broking website to monitor investments.

How does concentration risk affect mutual funds?


Concentration risk in mutual funds depends on the fund’s investment strategy. Some thematic or sector funds may carry higher concentration risk because they invest in limited industries.

Diversified equity funds usually spread investments across multiple sectors and companies. Debt funds may also diversify across issuers and maturities.

Mutual fund categoryTypical concentration levelRisk level
Sectoral/Thematic fundsHigherHigh to Very High
Large-cap fundsModerateModerate to High
Multi-cap fundsLowerModerate
Hybrid fundsLowerModerate
Debt fundsDepends on issuer mixLow to Moderate

How diversification helps mutual fund investors

Diversification may help reduce portfolio concentration risk over the long term. It spreads investments across different market segments instead of depending on one area.

On the Bajaj Broking website, investors can explore 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, thematic, and NFO categories. Both SIP and lumpsum investment modes are available for most schemes.

Conclusion

Concentration risk can affect your portfolio when too much money is invested in one sector, company, or asset class. Diversification helps reduce this unsystematic risk by spreading investments across different mutual fund categories.

Before investing, review the SEBI riskometer, understand the fund strategy, and check whether your portfolio is balanced. You can compare multiple mutual fund categories on the Bajaj Broking website, complete KYC online, and start SIP investments from Rs. 100 per month.

Frequently asked questions

How is concentration risk measured?

Concentration risk is measured by checking how much of your portfolio is invested in one company, sector, asset class, or theme. If a large percentage of your investments are linked to one area, portfolio concentration risk becomes higher. You can review fund allocation details, sector exposure, and SEBI riskometer labels before investing. The Bajaj Broking website also provides portfolio tracking tools to help you monitor your investments.

What are the consequences of concentration risk?

Concentration risk can increase portfolio volatility and lead to larger losses during market declines. For example, if most of your investments are in one sector, a slowdown in that sector may reduce your portfolio value sharply. This type of unsystematic risk affects specific investments rather than the overall market. Diversification across equity, debt, and hybrid funds may help reduce the impact.

How can concentration risk be managed?

You can manage concentration risk through diversification. This means spreading your money across different mutual fund categories, sectors, and asset classes instead of depending on one investment. SIP investments from Rs. 100 per month can help you invest gradually over time. On the Bajaj Broking website, you can explore 4,000+ mutual fund schemes and track allocations using Dashboard and Portfolio tools.

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

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