Curious Case of Diworsification: When More is Actually Less

Walk into any Indian kitchen, and you will find a Masala Dabba (spice box). It usually holds 5 to 7 essential spices - Turmeric, Cumin, Mustard seeds, Chili powder, etc. With just these few, a chef can create magic.

Now, imagine if you dumped every spice from the supermarket into the pan—Oregano, Garam Masala, Sambar powder, Pasta mix. Does the food taste better? No. It becomes an unrecognizable, tasteless mess.

This is exactly what is happening to investment portfolios across India. In the quest for Diversification (reducing risk), investors are stumbling into Diworsification (reducing returns while increasing complexity).

What is Diworsification?

Coined by legendary investor Peter Lynch, "Diworsification" is the practice of adding investments to a portfolio that are similar to what you already own, or are of poor quality, simply for the sake of having "more."

Diworsification – diversification done so badly that it actually worsens your portfolio.

Why This Hurts Your Wealth

1. The Illusion of Safety (Portfolio Overlap)

You might think owning an HDFC Large Cap Fund and an SBI Bluechip Fund protects you. Reality Check: Both funds likely invest in the same top companies — Reliance, Infosys, ICICI Bank. You haven't diversified; you've just duplicated. You are paying double the expense ratio for the same underlying assets.

2. Dilution of Returns

If you own 50 stocks, your "best idea" might only be 2% of your portfolio. Even if that stock doubles in value, your total portfolio barely moves (up by 2%). You have diluted your winners with too many average players.

3. The Tax & Tracking Headache

Have you ever tried to calculate Capital Gains Tax for 25 different SIPs redeemed at different times? It is a nightmare. Diworsification turns your weekend peace into a spreadsheet struggle.

The Collector Syndrome

Why do we do this? It’s often to avoid missing out on things.

• 2020: "Pharma is booming, buy a Pharma fund!"

• 2021: "IT is booming, buy a Tech fund!"

• 2023: "Defense stocks are hot!"

• 2024: "Manufacturing will increase in India"

Instead of a strategy, the portfolio becomes a scrapbook of yesterday's headlines.

Signs Your Portfolio Is "Diworsified"

Area	Healthy Diversification	Diworsification Red Flags
Mutual Funds	4–7 well-chosen funds across categories	12–20+ funds, many in same category
Insurance	1 or 2 term plans + 1 health cover	Multiple ULIPs + endowment + money-back plans
FDs & Debt	1–3 FDs/debt funds for goals/emergency	FDs in every bank you have visited
Tracking	You can list your main investments from memory	You discover “forgotten” folios regularly

If you tick more boxes in the right-hand column, you’re probably diworsified.

How to Fix It: The Marie Condo Method

Step 1: The overlap test

Check your Mutual Funds. Merge similar themed funds. If two funds share 60-80% of the same stocks, kill one. You don't need both.

Step 2: The " meaningful impact" rule

If an investment is less than 5% of your total net worth, ask yourself why it’s there. Example: Having ₹50,000 in Gold when your portfolio is ₹1 Crore. Even if Gold prices skyrocket, it won't change your life. Either increase the allocation to a meaningful 5-10%, or exit.

Step 3: Focus on Asset Classes, not Products

True diversification isn't buying 10 equity funds. For a typical salaried family (30–45 years) with 10+ year goals:

• Equity: 60–80% (mutual funds, maybe some direct equity)

• Debt: 15–30% (EPF, PPF, debt funds, NPS debt)

• Gold/Silver: 5–10% (Physical Gold, ETFs – not just jewellery)

Exact mix depends on your risk appetite, job stability, and goals.

FAQs

Isn't more funds automatically means lower risk?

Not necessarily. If all your funds buy the same top 100 stocks, the risk is almost the same as holding 2–3 funds.

Isn't real estate the best diversifier?

Yes, but it is illiquid. In an emergency, you can't sell "one bedroom" of your flat. Ensure you have liquid assets (Stocks/MFs) before locking money in property.

Conclusion

Warren Buffett famously said, "Wide diversification is only required when investors do not understand what they are doing."

You don't need a "thali" with 50 items to be healthy. You need a balanced diet. Stop collecting financial products like souvenirs. Start building a focused strategy that lets your money work harder than you do.

Ready to declutter? If your portfolio feels heavy and hard to track, it might be time for a professional detox.

Happy Investing!