Concentration can highlight skill, but it also raises the cost of being wrong. When you run a focused portfolio, you need clear limits, honest exposure checks, and decisions made before markets turn volatile. The goal is to manage drawdowns through cycles without weakening your thesis or breaching your mandate.
Why Concentration Raises the Stakes
With fewer names, each stock carries more weight. You face higher company-specific risk, sharper sector shocks, and style cycles. Correlations can jump, liquidity can disappear, and one error can dominate results. This is why you need pre-defined limits, realistic exit plans, and frequent checks of what the portfolio is truly exposed to.
Portfolio Risk Management Principles for Concentrated Holdings
Clear limits, honest exposure checks, and pre-set actions.
Define the Risk Budget and Thesis Per Position
For each holding, document your thesis in clear terms: why you own it, what needs to go right, and what could go wrong. Also, define the specific signals that would invalidate the idea, so your decision-making stays disciplined under pressure.
Next, allocate a defined share of the overall risk budget to the position. Set the maximum loss you are willing to tolerate from that single holding, and size the position so this limit is realistic and enforceable.
Position Sizing and Exposure Limits
Use caps at the single-stock and sector level. Add limits for themes that behave like hidden sectors, such as rate-sensitive stocks or businesses tied to the same commodity.
Set tighter caps when liquidity is weaker or governance is uncertain. In a concentrated book, small trims and top-ups matter, so resize only with a written reason.
Correlation and Common-Factor Checks
Do not assume you are diversified because businesses look different. Two stocks can still move together if they share a driver like rates, currency, or input costs.
Review correlations and factor exposures regularly. If several positions depend on the same driver, reduce overlap early.
Liquidity and Execution Discipline
Treat liquidity as both a selection filter and an exit plan. Track average traded value, market depth, and signs of crowding. If a stock is thinly traded, assume exits will take longer and keep order sizes small.
Enter and exit in stages. Avoid heavy trading around events when spreads widen. Keep a playbook for what you will do if liquidity drops, so you do not panic-trade.
Drawdown Controls That Respect the Thesis
Set drawdown thresholds at the portfolio and position level. These should trigger a review, not a reflex sell. Use two checks. First, a price check: the move is large enough to demand attention.
Second, a thesis check: has new information changed the business case? If the thesis breaks, act quickly. If the thesis holds, be conservative with adding more.
Scenario Analysis for the Real World
Run scenarios that reflect Indian market risks: governance lapses, rule changes, promoter concentration, funding stress, liquidity squeezes, and currency swings. The point is to see where losses could hit many holdings at once, and adjust sizing in advance.
Hedging Policy With Explicit Constraints
Hedges can reduce risk, but they add cost and complexity. If you hedge, define the rules: eligible instruments, maximum gross exposure, time limits, and review cadence.
Also, define the goal. Are you reducing drawdowns, smoothing volatility, or covering a specific event risk? Stay within the mandate and regulatory limits.
Governance, Documentation and Reporting
Maintain an investment diary, record review notes, and log changes to limits or models. If you review with a team, capture short minutes and action points. In reporting, separate performance attribution from risk attribution, so you can see whether returns came from skill or from taking extra risk.
Where Concentrated Portfolios are Commonly Used in India
Discretionary and non-discretionary portfolio management services often use focused strategies because they already emphasise rules, reporting, and mandate clarity.
What to Ask Before You Allocate
Ask these before committing capital. These questions show how the manager behaves under stress.
- How are position and sector caps set, and how often are they reviewed?
- How is liquidity managed in stressed markets?
- Which risk reports are shared, and how often?
- How are thesis breaks spotted and acted on?
- What is the policy on hedging and leverage?
Practical Guardrails to Keep You Honest
Here are the key pointers:
- Write the rules, enforce limits, verify independently, and document decisions.
- Keep a one-page rulebook for risk budget, limits, rebalancing, and escalation.
- Use independent checks for correlation, liquidity, and event risk.
- Pre-commit to actions at drawdown thresholds.
- Document changes, and pull the process back if it drifts.
Final Thoughts
Concentration needs structure. Strong portfolio risk management protects conviction rather than suppressing it. If you write the rules, measure exposure honestly, and plan for rough markets in advance, you give your focused portfolio a better chance of staying steady through volatility.