How it unfolds, step by step
The setup
Take that portfolio. It holds ₹60,000 in one name and ₹10,000 in each of four others. There are five names in it, and the largest is 60% of the money. Another portfolio might hold five names of ₹20,000 each. But if all five depend on one industry cycle, that is five names and one exposure.
What happens next
Now let the largest holding alone fall 20% while the other four are unchanged. The portfolio loses ₹12,000, which is 12% of it. That concentration explains why counting positions can hide the exposure that moves the total.
What it means — and does not
A weight is a fact about a portfolio. Whether concentration usually costs money is a base-rate question. A base rate is how often the outcome happens anyway, over the same population and period. This page does not answer that question. What the arithmetic does show is that names and exposures are different things. Funds can overlap in the shares they hold. A reader's salary or business income can depend on the same conditions their investments do. Diversification also does not remove market risk. Holdings that usually move apart can start moving together, and one broad shock can hit several of them at once. On the second half, the ratio matters because the shortcut drifts. Work 1.05 ÷ 1.06 − 1 and the answer is about −0.94%. So a larger rupee balance can buy slightly less than before.
- Real return, % a year
- Growth exactly matches the basket · 0
Real return against nominal return, with the assumed inflation rate held at 6%. The line is (1 + nominal) ÷ (1 + inflation) − 1, the ratio form this site's own calculators use. So 8% growth leaves about 1.89%, and 5% growth leaves about −0.94%. Keep 6% fixed as the inflation assumption while comparing nominal rates.
Show the underlying data
| Nominal return, % a year | Real return, % a year |
|---|---|
| 3 | -2.83 |
| 4 | -1.89 |
| 5 | -0.94 |
| 6 | 0 |
| 7 | 0.94 |
| 8 | 1.89 |
| 9 | 2.83 |
| 10 | 3.77 |
| 11 | 4.72 |
| 12 | 5.66 |
What this does not establish
The reading stops holding as soon as the numbers being compared are not on the same basis. Inflation here is an assumption the reader supplies. A person's own expenses can move quite differently from a published index. So the real figure is arithmetic on that assumption, not a measurement of anyone's cost of living. Periods have to match too. Set a five-year growth rate against one month's inflation reading, and the purchasing-power claim that comes out is supported by neither number. The concentration figure holds only for the weights as they stand, and weights drift as prices move. A return before costs and tax is also not the amount available to spend. Two separate calculations handle that: /tools/cagr-calculator works the growth rate and /tools/capital-gains-calculator handles the tax step. This page states no current or expected inflation rate. The 6% used throughout is a number chosen to make the arithmetic easy to follow.
Things to check
7What share of the portfolio is the largest holding, as a percentage rather than as one name among several?
Do the holdings depend on different drivers, or on the same one wearing different labels?
Does the inflation assumption cover the same period as the return it is being set against?
Was the real figure worked as (1 + nominal) ÷ (1 + inflation) − 1, rather than as a subtraction?
Are costs and tax still to come out of the number being read as a result?
Is money needed soon being separated from money assumed to compound for years?
Use 6% as the inflation assumption in this comparison. Check each holding's share of the total.
Common mistakes
5Subtracting inflation from the return, so that 8% − 6% reads 2%. The ratio gives 1.89%, and the gap between the two widens as both rates rise.
Counting names instead of weights. A portfolio that is 60% one holding then gets called diversified because it holds five positions.
Comparing a multi-year growth rate with a single month's inflation reading.
Reading a positive nominal return as a gain in purchasing power without doing the second calculation at all.
Treating diversification as protection against a broad market fall rather than against a single exposure.
A portfolio grows 8% over a year while the reader's assumed inflation is 6%. What is the real return?
- 2%, the difference between the two rates
- About 1.89%, because the calculation is the ratio (1 + 0.08) ÷ (1 + 0.06) − 1 rather than a subtraction of one rate from the other
- It cannot be negative, because the growth was positive
Show the answer
B. About 1.89%, because the calculation is the ratio (1 + 0.08) ÷ (1 + 0.06) − 1 rather than a subtraction of one rate from the other
Subtraction is the shortcut everyone reaches for. At small rates it lands close enough to feel correct, which is exactly why the error survives. The ratio is the calculation. The gap between the two widens as both rates rise. The third option fails on the same arithmetic. Growth of 5% against 6% inflation gives about −0.94%, which is a larger balance that buys slightly less.
Frequently asked
3Do ten holdings automatically mean good diversification?
No. The weights and the underlying exposures decide that. Ten names that rise and fall with one industry cycle are closer to one position than to ten.
Can a positive return still lose purchasing power?
Yes. If growth is 5% while the assumed inflation is 6%, the ratio gives about −0.94%: a larger balance that buys slightly less of the same basket.
Does diversification remove market risk?
No. It spreads exposure across different drivers. Holdings that usually move apart can start moving together, and a broad shock can move several of them at once, however many there are.