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 doesnt provide as much profit.
b. when there is too much diversification in a mutual fund, great success in a single stock doesnt 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.
please select the best answer from the choices provided
a
b
c

Explanation:

Excessive diversification (over-diversification) in mutual funds dilutes the impact of high-performing individual securities. Since the fund's assets are spread across too many holdings, strong gains from one stock have a negligible effect on the total fund return. Additionally, it can lead to returns that closely match broad market benchmarks, eliminating the potential for outperformance, which is a key concern for investors. The other options are less accurate: increased costs are not the core issue, modern tracking systems mitigate "lost" investments, and taxes do not have a drastic, direct link to over-diversification.

Answer:

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.