1. While a portfolio with a single mutual fund has high standard deviation - big gains, heavy losses - addition of funds brings it down significantly, thus reducing portfolio risk.
2. However, after a critical number of funds - around 5 or 6 - a portfolio’s standard deviation doesn't differ much with additions.
3. In an over-diversified portfolio, returns of good mutual funds don't get truly reflected as their contribution is diluted by under-performers.
4. Also, probability of duplication and overlapping is higher, as each diversified mutual fund invests in 40-50 stocks, and funds of same category are likely to invest in same companies and sectors overall.
5. However, diversifying across fund houses is healthier for a portfolio, to reduce risk of any of them going downhill for own unique reasons.
2. However, after a critical number of funds - around 5 or 6 - a portfolio’s standard deviation doesn't differ much with additions.
3. In an over-diversified portfolio, returns of good mutual funds don't get truly reflected as their contribution is diluted by under-performers.
4. Also, probability of duplication and overlapping is higher, as each diversified mutual fund invests in 40-50 stocks, and funds of same category are likely to invest in same companies and sectors overall.
5. However, diversifying across fund houses is healthier for a portfolio, to reduce risk of any of them going downhill for own unique reasons.