If you observe how people invest, one thing becomes clear. Most investors put the majority of their money in the country where they live.

That is not surprising. Our income comes from the country we live in. The same goes for our expenses. We understand how the banking system works. When policies change, we see how they affect businesses around us. 

Naturally, investing locally feels familiar. And this is largely for the entire population that is actually investing.

Behaviour by Indian investors is no different.

India represents roughly 4 to 5% of the global equity market. Yet many Indian investors keep almost all of their equity exposure within India. The same happens in other countries. Investors in the United States largely invest in US markets. Investors in Japan favour Japanese companies.

This behaviour is known as home-country bias.

The term simply describes a tendency: people allocate a larger share of their investments to their own country. It happens naturally because we understand our own environment better than others and feel comfortable.

As a result, portfolios may contain different assets, but they remain closely tied to one country.

Understanding this tendency is an important step in understanding what diversification really means.