Factors Affecting Portfolio Diversification and Investment Return in India

Abstract

Portfolio diversification is an important investment strategy for managing risk and improving the balance between risk and return. However, investment decisions are influenced not only by market conditions and asset allocation but also by behavioural factors such as overconfidence, loss aversion, herding behaviour and risk perception. In the Indian investment context, understanding how these factors relate to diversification practices is important for interpreting investment outcomes. This study examines portfolio-diversification and investment-return patterns among individual investors in India and considers behavioural factors identified in the literature, including overconfidence, loss aversion, herding behaviour and risk perception. It uses secondary data from official Indian financial and market sources covering individual and institutional investors, equities, mutual funds, debt and hybrid instruments, household financial assets, stock-market indices and industry sectors. The analysis describes asset-allocation and diversification patterns and considers their relationship with investment performance and market risk. The evidence shows that individual investors accounted for 61.6% of mutual-fund assets under management in November 2025. Annual systematic investment plan contributions increased from ₹1.99 lakh crore in FY2023-24 to ₹2.89 lakh crore in FY2024-25, while SIP assets reached ₹13.35 lakh crore in March 2025. Nifty 50 Total Return performance varied substantially across years, illustrating changing market conditions and the relevance of diversification. Household financial-asset data also indicate allocation across deposits, insurance, provident and pension funds, mutual funds and equities. These patterns suggest that portfolio outcomes are associated with investor participation, asset allocation, market conditions and diversification choices. However, aggregate secondary data do not directly measure individual behavioural biases and do not provide matched investor-level observations for regression or mediation analysis; the study therefore does not establish causal relationships. The findings support a cautious interpretation of diversification as a risk-management approach whose outcomes depend on portfolio construction and market conditions.