Jeff Bezos, Bill Gates, Steve Jobs, Larry Ellison, Dhirubhai Ambani, Michael Dell—all have something in common apart from being first-generation billionaires. Each built his own fortune by focussing only on one business. 

So, focus is one way to become insanely rich? However, literally one in a hundred million businesses takes off to that extent. In addition to being highly skilled, an entrepreneur needs to be very, very lucky to have started one of those platinum-plated businesses.

Instead of aiming for the Fortune 500 list, if you just want a decent return on investments, it is safer to hold a diversified portfolio.  Most people instinctively understand why diversification works: different industries do well at different times and a well-diversified portfolio contains some winners at all times. The drawback of diversification is—a part of the portfolio will be doing badly all the time! You need to diversify well, to create a portfolio without too much junk.

The logic of diversification can be taken a step further. Different national economies do well at different points of time.  So if you have interests spread across industries and countries, there are even better chances that some of your portfolio will be performing well at any given time.

Most investors do diversify, but not everyone does it well. The simplest way to diversify is through an ETF, or an index fund, tracking a diversified index like the Nifty. Expense is one consideration here, and another thing to watch is tracking error. Obviously you want the lowest expense ratio, and the lowest tracking error.

Things get more complicated when an investor wants to beat the index return. There are many Indian diversified equity funds with excellent track records when it comes to beating the index. However, many of these funds are not diversified in themselves—some are highly concentrated in a few sectors.  The danger there is underperformance, in overweight sectors.

When a fund is reasonably diversified, the portfolio is very likely to resemble other diversified funds with similar track records.  Therefore, simply buying a basket of several diversified equity funds with decent records may not give more diversification. The portfolios must be compared to ensure that Fund A and Fund B is not simply the same portfolio multiplied.

An active investor who buys equity directly has to be even more careful. It is very easy to double down on a given stock, or sector, to the point where one holding dominates a portfolio. This creates millionaire-or-bust situations.  If that stock is a multi-bagger, fine. If it turns out to be an underperformer, well—not so good. Rebalancing portfolios are a must. If you are overweight, you must know exactly why you are overweight and be prepared to correct, as and when required.

Things get really complex when you start looking at possible diversification overseas. In a sense, buying Indian exporters gives exposure to other economies and the simple equation of a weaker rupee can generate higher returns for exporters.

But if you want more overseas exposure than just export-oriented Indian stocks, the logistics may turn out to be daunting.  In theory, you can park up to US $250,000 abroad every year. But that involves a fair amount of paperwork, finding brokerages that cover the stocks you want, working out tax implications, etc. 

You can also invest in international funds available in India itself. Units of these can be bought in rupees, with no limits.  This approach is probably more practical. Of course, research into portfolios, track record, etc., remains. 

Is it worth taking the time and trouble to look at some overseas exposure? Obviously, there could be much more in the way of opportunities since the basket of potential investments grows. If you have some overseas holdings, you are hedged against a broad bear market in India and also against a falling rupee.

Diversification is a safety play.  It is designed to protect against disaster. Diversifying across countries widens the safety net. 

The author tracks economic, behavioural and corporate trends, hoping to gauge good avenues for returns