Tipping Point: Are you aware of the concentration risk in your fund?

When selecting a fund, you should not go by past returns alone. One parameter you should also check is the level of concentration risk present in it. A fund that is more concentrated will have a higher percentage of its portfolio concentrated in the top three (or five or 10) sectors in its portfolio compared to its peers. (Concentration risk can also be measured by looking at the numbers for company concentration.)  To judge whether a fund is more or less concentrated, check its sector concentration vis-à-vis that of its peers. If it is higher, it is more concentrated. A concentrated fund can give high returns if the stock selection goes right, but it can also fall harder if stock selection goes wrong.