One of the biggest hurdle which a young investor faces is whether to concentrate or diversify your investment.
This persists over your life time of investment and in particular when you read one story that small and midcap has done 40-50% return or sometimes you see that small and midcap has collapsed. Thus at times, in particularly hindsight, you feel you should diversify or concentrate.
My personal take is as follows, Though I respect each individuals risk taking and risk losing ability.
If you are a person looking for a steady growth over a period of time and not bothered about 40-50% some one made or is making, then go for DIVERSIFICATION. That is out of 100 Rs, you put some in index fund, some in large cap, some in midcap, some in small cap and some in gold.
On the other hand if you are a person who likes to take risk and does not mind losing a large chunk of money (like a lottery), you may go the risky funds way. Like if you have 100 Rs, invest 50 in small cap and 50 in mid caps. It may or may not give you the returns you want.
Finally, if you have reached your goals of having sufficient money by following diversification at a certain point of life, you can take a chance and risk some in IPOs, small caps or midcaps or direct equity.
Thus Diversification on Concentration is a state of mind play as well as the backup funds you have.
As a note of caution, while diversification is good, too much diversification will also not help. Thus 100 rs is invested in 50 stocks. A gain of 1 re in some will not generate wealth. Maximum recommended is 10-15 stocks or 5-6 mutual funds. This helps you to concentrate your understanding on these rather than getting lost in too many stocks.
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