Question

Why is too much diversification considered a negative thing when dealing in a mutual funds?
a.
Higher diversification means that the mutual fund costs a lot more and doesn’t provide as much profit.
b.
When there is too much diversification in a mutual fund, great success in a single stock doesn’t make much of a difference in the overall progress of the fund.
c.
If there are too many different investments, it would be too hard to keep track of them and some would inevitably get lost in the system.
d.
Greater diversification means a drastic increase in taxes, so most companies avoid overly diversifying the mutual fund.

Answer 1

Correct answer: b.

Too much diversification dilutes the impact of any single big winner, so exceptional gains in one holding have little effect on the fund’s overall returns (sometimes called "diworsification").