Market Movements Cause Portfolio Drift and Concentration Risk in Passive Investing

Market movements can cause portfolio composition to drift, increasing unintended concentration risk within investment portfolios. This shift can occur even if investors continue holding the same schemes without fresh investments or withdrawals. Market movements can alter the balance between equity and debt or increase exposure to mid- and small-cap stocks, causing certain holdings to account for a larger share of the portfolio.

This phenomenon is a risk inherent in passive investing trends. When equities rise faster than debt, originally balanced portfolios can gradually become equity-heavy. Fund managers are required to buy and sell securities within their mandates as underlying portfolios change over time.

Market concentration is occurring due to trends in passive investing, affecting small companies.