The Mutual Fund Trap: Why Most Diwali Investors Think They're Diversified (But Aren’t)

Saturday, Oct 18, 2025

Each Diwali, investors will light diyas, look at the best stocks to buy before Diwali and go into Muhurat Trading in hope of having a good year in the new Samvat year. However, lots of them are trap into what we refer to as The Mutual Fund Trap.

They think that with 10-15 varied mutual funds under their belt, they have literally diversified well.

But here is the bitter reality, being a holder of several mutual funds does not imply you are diversified.

Entering Samvat 2082, we discuss why the vast majority of Diwali investors believe they are diversified (when they are not) and how to create a portfolio that indeed safeguards and generates wealth over market cycles.

What do most investors mean when they say they’re “diversified”?

When they say they are diversified, investors typically mean they have invested in numerous mutual funds, i.e., one large-cap fund, a mid-cap, an ELSS, a flexi-cap, and possibly one or two sectoral funds.

It sounds logical at first sight. Ten funds = ten baskets, right?

Wrong.

A majority of investors mix name diversification with asset diversification.

Misconception	Reality
I have 10 mutual funds.	You own the same 50 stocks across all of them.
I’m diversified because I own large-cap, flexi-cap, and multi-cap funds.	All three funds might have Reliance, HDFC Bank, Infosys, and ICICI Bank at the top.
My portfolio is safe because I hold equity funds and hybrid funds.	Your hybrid fund still holds 70% equity - little real difference in exposure.

Why doesn’t owning multiple mutual funds create real diversification?

Let’s break down the illusion.

1. Portfolio Overlap Is the Hidden Culprit

Imagine buying three large-cap mutual funds this Diwali - Axis Bluechip, ICICI Prudential Bluechip, and HDFC Top 100.

Each of these funds owns:

• Reliance Industries
• HDFC Bank
• Infosys
• ICICI Bank
• TCS

If you combine these three funds, over 65–70% of holdings overlap.

2. Different Names, Same Risk

Fund names often give an illusion of variety - “Flexi-cap,” “ELSS,” “Value Fund,” “Focused Fund.”
But the underlying asset class is still equity, meaning all your money moves in one direction when markets fall.

When NIFTY drops 10%, almost all your funds drop too - because their holdings are correlated.

3. Correlation during Crises

In 2008, 2020, and even 2022, markets showed one clear pattern:
When panic strikes, everything equity-related falls together.
So, 10 mutual funds don’t protect you any better than one - they just make your portfolio look complicated.

What is true diversification in investment portfolios?

True diversification means owning assets that behave differently under different market conditions.
It’s not about how many funds or stocks you own - it’s about how they move relative to each other.

1. Diversify Across Asset Classes

A truly diversified portfolio includes:

• Equity: For long-term growth (stocks, mutual funds, Smallcases)
• Gold: As a hedge against inflation and crises
• Silver: For cyclical and industrial demand
• Debt: For stability and regular income

Asset Class	Purpose	Behavior
Equity	Growth engine	High returns, high volatility
Debt	Stability	Low returns, low volatility
Gold	Crisis hedge	Rises during inflation or uncertainty
Silver	Growth + hedge hybrid	Volatile but often moves opposite to equity

2. Diversify Within Equity Too

Even within your equity allocation, sector diversification matters.
Don’t overload on financials or tech just because they dominate NIFTY.

Sectors to consider in Samvat 2082:

• Pharma: Defensive play in uncertain markets
• Auto: Revival story with EV theme
• Defence: Government-backed growth
• Railways: Infra expansion driver
• Green Energy: The future of sustainable investing

How do asset classes behave differently during market cycles?

Market Phase	Equity	Gold	Silver	Debt
Bull Run	Soars	Often lags	Volatile	Steady
Correction	Falls sharply	Rises	Moderate	Stable
Inflation	Struggles	Shines	Outperforms	Mixed
Crisis (COVID, 2008)	Crashes	Surges	Defensive	Gains modestly

Example: The Diwali of 2020

• NIFTY crashed 38% in March 2020.
• Gold prices rose over 25% that year.
• Investors who had gold and silver exposure saw their portfolios recover faster and fall less.

That’s the power of complementary assets.

Why do most Diwali investors fall into the “Mutual Fund Trap”?

Because it feels comfortable.
Buying a mutual fund during Diwali Muhurat Trading feels festive, familiar, and safe - like lighting a diya without realizing the flame could burn your hand.

Here’s why this trap is so common:

1. Ease of Marketing: Mutual funds are heavily advertised - “Mutual Funds Sahi Hai!” - but simplicity can hide complexity.
2. Lack of Transparency: Few investors ever check overlap reports.
3. Behavioral Bias: People equate “more” with “safer.” But in investing, more funds often mean more confusion.
4. Tax Myths: Many believe ELSS alone is diversification - it’s not; it’s just equity in disguise.

What should Diwali investors look for in a truly diversified portfolio?

Here’s your Diwali diversification checklist - because this Samvat, we want you to build wealth that lasts longer than firecrackers.

1. Mix of Asset Classes

A balanced Diwali portfolio might look like this:

• 70% Equity (growth engine)
• 20% Gold (crisis shield)
• 10% Silver or Debt (stability buffer)

2. Complementary Behavior

Own assets that don’t move together:

• Gold and equity tend to move oppositely.
• Silver can amplify growth phases but also hedge inflation.
• Debt cushions volatility when markets swing.

How is Samvat 2082 the perfect time for real diversification?

Samvat 2082 is not just a new year - it’s a new investing mindset.
This Diwali, markets are buzzing with talk of best stocks to buy before Diwali, top Mahurat Trading picks, and New Year stocks to invest in.

But before you pick your “Diwali best stock,” pause and ask:

“Am I diversifying - or just multiplying equity risk?”

At Green Portfolio, we approach diversification with a 10-80-10 Framework designed specifically for Diwali investors seeking balance and growth.

What is the 10-80-10 Framework, and why does it work?

Component	Allocation	Role
10% Gold & Silver	10%	Hedge against inflation and volatility
80% Equity	80%	Core long-term wealth generator
10% Debt or Liquid Assets	10%	Tactical buffer and liquidity

Why this structure works:

• Keeps your equity returns high enough for long-term wealth creation.
• Adds resilience through metals like gold and silver, which thrive when markets panic.
• Ensures liquidity and stability through short-term debt allocation.

How does Green Portfolio’s Smallcase help hesitant investors start right this Diwali?

Many first-time investors hesitate during Diwali Muhurat Trading because they fear market volatility or lack time for research.

Green Portfolio’s Smallcases solve this perfectly.

How?

• Expert Curation: Portfolios built by SEBI-registered professionals.
• Thematic Diversification: Exposure to multiple sectors - defence, auto, energy, pharma, and more.
• Automatic Rebalancing: Periodic updates to maintain balance.
• Transparency: You can see every stock in your basket.

How does “real diversification” protect you when markets fall?

Imagine two Diwali investors:

Investor	Portfolio	Outcome in 2020 Crash
Person 1 (Mutual Fund Collector)	10 equity mutual funds	Portfolio fell 38%
Person 2 (Diversified via Green Portfolio Smallcase)	70% Equity + 20% Gold + 10% Silver	Portfolio fell only 18%, recovered in 3 months

The difference?
Asset-class diversification, not fund multiplication.

Real diversification cushions shocks, protects capital, and helps you sleep peacefully even when markets don’t.

How do you identify portfolio overlap before it’s too late?

If you already own multiple mutual funds, it’s time for a quick overlap check.

Here’s a simple method:

1. Visit mutual fund tracking sites like Morningstar or Value Research.
2. Download the top holdings of each fund.
3. Highlight repeating stocks - you’ll likely see Reliance, HDFC Bank, Infosys everywhere.
4. Calculate overlap % using free online tools.
5. Anything above 50% overlap = fake diversification.

Where should you invest money this Diwali for real wealth creation?

Instead of chasing best penny stocks for Diwali or Muhurat shares to buy, ask:

“Where will my wealth work harder and last longer?”

Here’s a smart Diwali action plan:

• Step 1: Review your mutual funds - check for overlap.
• Step 2: Reallocate across asset classes - not just across fund names.
• Step 3: Add uncorrelated assets like gold and silver.
• Step 4: Get expert-managed solutions like Green Portfolio PMS or Smallcases.
• Step 5: Stick with it through Samvat 2082 - wealth builds with consistency, not luck.

Why is “fake diversification” dangerous in the long run?

Because it gives a false sense of security.
When the market rises, fake diversification looks fine - but when the tide turns, it reveals everyone swimming naked.

The long-term risks include:

• Over-concentration: All your eggs (funds) in the same equity basket.
• Reduced returns: Overlapping holdings mean your portfolio underperforms benchmarks.
• High taxes: Frequent fund switching increases tax liabilities.
• No stability: Volatility shocks hit all your funds simultaneously.

Can Diwali investing still be exciting and safe?

Absolutely - if you invest smartly.
Diwali symbolizes new beginnings - and this Samvat, make yours about intelligent, data-backed diversification.

Instead of buying 10 funds you don’t understand:

• Buy one well-constructed Smallcase or PMS portfolio.
• Instead of “best stock for Diwali,” look for balanced allocation.
• Instead of “Deepavali trading tips,” aim for long-term asset harmony.

So, what’s the takeaway for Diwali 2025 and Samvat 2082?

True diversification isn’t about owning more - it’s about owning wisely.

When you diversify across asset classes, sectors, and cycles, you protect your portfolio from shocks and set yourself up for steady compounding.

As you light diyas this year, let one flame remind you:

• Equity fuels growth
• Gold guards your peace
• Silver adds balance
• Debt keeps you grounded

Final Thoughts

This Diwali Muhurat Trading, don’t just ask “Which stock to buy before Diwali?”
Ask instead -

“Is my portfolio truly diversified, or just decorated with different labels?”

Because in investing - as in life - depth beats decoration.

And at Green Portfolio, we don’t just pick funds; we build financial ecosystems that thrive across every Samvat.