Concentration risk is the excess risk arising from overexposure to a single stock, sector, geography, or asset class — reducing the protective effect of diversification.
Concentration risk arises when too much of a portfolio is in one stock (stock concentration), one sector (sector concentration), one country (geographical concentration), or one asset class (asset class concentration). Concentrated portfolios can deliver spectacular returns when the concentrated bet pays off and catastrophic losses when it doesn't. SEBI mandates position limits for mutual funds to prevent excessive concentration in individual stocks.
If you put 30% of your portfolio in one company's stock and that company goes bankrupt, you've lost 30% of everything. That's concentration risk. A well-diversified fund spreads investments across 50–100 stocks so no single failure is catastrophic. Sectoral funds carry concentration risk by design. Focused funds carry it within equity. When a fund's top 10 stocks constitute 60–70% of the portfolio, concentration risk is high.
SEBI limits single-stock exposure to 10% of NAV for most equity fund categories.
Check the fund's 'top 10 holdings %' — above 50% in top 10 indicates meaningful concentration.
Sector allocation: if 40%+ in one sector, it's concentrated in that sector.
Geographical concentration: India-focused funds have concentration in Indian market risk.