In the past couple of months, I happened to discuss the market situation with several market participants, including investors, advisors, distributors, brokers and portfolio managers.
Three sentiments were common to all of them. First, the pain of losses. Second, disappointment that Indian equities have underperformed despite resilient GDP growth and decent corporate earnings. Third, anxiety over the trend in bond yields and precious metals prices. Most of them blamed the government’s taxation policies and over-regulation of markets for the present condition, though they also recognized that global geopolitics and the weather are playing a part.
These points have been widely discussed and examined by analysts, so I will not add to them. What stayed with me from these conversations is something else: how little most investors understand about risk management.
Diversification alone does not reduce risk
Most investors I spoke to mistake diversification for risk management. They spread money across equity, fixed income and alternatives, mostly gold, silver and REITs. Then they spread it again within each: market cap, sectors, fund managers, bond duration and so on.
What gets missed is that diversification reduces risk only when the assets in the portfolio do not move together. It is low correlation that does the work, not the number of holdings. Three things follow from this.
· Market cap and sector spread helps little if the overall portfolio beta stays high. In a falling market most stocks fall together, only by different amounts.
· Several fund managers do not mean several different portfolios. If their holdings overlap, the portfolio is more concentrated than it looks. Check the overlap before adding the next fund.
· When the weakness comes from macro and geopolitical factors, correlations rise and most assets fall together. That is what we see now. In dollar terms, gold is about a quarter below its January peak and silver is down by nearly half. Bond yields have risen to multi-year highs, the rupee has been hovering around 96 to the dollar, and the Nifty is down ~15% from its September 2024 peak. The assets that were meant to cushion the equity portfolio fell along with it.
The third point also shows the limit of the idea. No asset stays uncorrelated in every situation. In March 2020 even gold was sold, because everyone wanted cash. So, the question to ask is not only whether the assets are different, but whether they will still be different when it matters.
A fixed return is not a risk-free return
A bond, or a bond fund, that you may sell before maturity does not give a fixed income in the sense most investors understand it. Its price moves with yields, and yields have gone up. Only a bank deposit, or a bond that you will hold till maturity, gives a return known in advance. Even these are not risk free. They carry credit risk, reinvestment risk and inflation risk.
Gold: where did the return come from?
Gold carries currency and policy risk too. Take the period since the October 2025 peak. Gold in dollars is down by about 3%, but in rupees it is up by about 15%. In the same period the rupee is weaker by about 8%, and the import duty was raised in May from 6% to 15%, which adds about 8.5% to the landed price. Put these together and the entire return in rupees comes from the weaker currency and the higher duty. The metal itself gave nothing.
The risks everyone is watching
Most investors and fund managers named the risks that are visible today. A strong El Nino pushing up food inflation, a further rise in crude oil prices, and a collapse of the debt-funded global AI trade leading to a Lehman-like credit event were the ones cited most. These are fair concerns, and seeing a risk is the first step in managing it.
But even for these, there is little action. In India, derivatives are used mostly for speculation and rarely for hedging. The latest SEBI study found that nearly 88% of individual F&O traders lost money in FY26.
The risks nobody is watching
What troubled me more was that none of the participants mentioned an event that cannot be foreseen today. Yet if we look back, the events that hurt investors the most were rarely on anyone’s list. Few expected Lehman to fail in 2008. No list of risks in January 2020 had a worldwide lockdown. Demonetization in November 2016 came without a warning.
So let me stretch the mind a little. I am not saying any of the following will happen. My point is that each is possible, and a portfolio built only for visible risks would not survive it.
· Rules change overnight. India nationalized banks in 1969 and had gold control until 1990. In May this year, the import duty on gold went from 6% to 15% by a single notification, and the Prime Minister asked citizens to curb gold buying for a year. What if a government under fiscal and currency stress goes further, with price caps, windfall levies or limits on what households can hold?
· Market plumbing fails. A cyber-attack takes exchanges, depositories or payment systems offline for a week. Positions cannot be exited, margins cannot be paid, and there is no price to act on.
· A big seller of gold appears. Central banks have been the steadiest buyers. China’s central bank has added gold for 23 months in a row and now holds about 2,400 tonnes. What if it sells 500 tonnes in the open market, roughly a fifth of its holdings and almost five times what it has bought this year? A sale of that size would hit the price and the story behind the price together.
· Old rivals become partners. The US and Russia are seen as arch rivals, and that perception shapes much of the US–Europe relationship. Yet they fought on the same side in the Second World War and, apart from a short American intervention in the Russian civil war in 1918–20, have never fought each other directly. A thaw has already begun: this month the US waived some sanctions to let Russian diesel reach the market, and Moscow has called it a model for further deals. What if this grows into a durable economic understanding? Europe’s security assumptions, energy flows, defence spending and many investment themes built on the rivalry would need a rethink.
· The story behind a metal changes. One of the main arguments for silver has been industrial demand, and its largest industrial user is the solar panel. Manufacturers are already using less silver per cell and moving towards copper. Silver used in solar fell 6% in 2025 and is expected to fall another 19% this year. Silver has also dropped by nearly half from its January record of about $121 an ounce. Most of that fall was a speculative spike unwinding, so I do not blame substitution for it. But it shows how fast a price can move once the story beneath it weakens.
· Europe comes apart. EU members fall out over immigration policy and the union breaks up. Each member becomes a closely guarded jurisdiction, politically and economically. Property prices could fall sharply, unemployment could rise, inflation could stay higher for longer and sovereign defaults could stop being rare.
To most investors these examples may look farfetched, even the delusions of a paranoid mind. But none of them is without a precedent in history, and so none is outside the realm of possibility.
Why risk management gets ignored
Risk management is perhaps the most ignored and misunderstood part of investing in India. Investors mostly lack awareness. Intermediaries limit themselves to regulatory compliance. Exchanges are focused on smooth settlement. Regulators are busy balancing investor protection with the development and orderly functioning of the capital markets. None of them is doing anything wrong; each is doing what its mandate asks. But the result is that nobody owns the job of telling the investor what risk really means.
To me, risk management comes down to three things: holding assets that do not all fall together when it matters, hedging the risks we can see, and keeping enough slack to survive the ones we cannot.
Summary
• Diversification reduces risk only when assets do not fall together. Check how your assets behaved in bad times, and check the overlap across your funds.
• A fixed return is not a risk-free return. A bond you may sell before maturity is not fixed income.
• When you read a gold return, separate the metal from the currency and the import duty.
• Visible risks can be hedged at a cost. Invisible ones can only be survived. Plan for both.
• Test your portfolio against a long, deep fall in everything at once. If you would be a forced seller, fix that first.
A closing thought
The Bhagavad Gita (18.14) lists five factors behind every outcome: the seat of action, the doer, the instruments, the many kinds of effort, and fifth, daivam – fate, or the unseen:
अधिष्ठानं तथा कर्ता करणं च पृथग्विधम् । विविधाश्च पृथक्चेष्टा दैवं चैवात्र पंचमम् ॥
Our models and spreadsheets deal with the first four. Risk management is the effort to leave room for the fifth.