Diversification in investment must be considered as a rule, which reduces the risks involved in it. If the money has been invested in just one or two stocks, bonds or anywhere else the risk you cover is quite high. In this case there are possibilities that your money may be wiped out off the scene.



When you diversify your investment you ensure that there are smooth returns without involving much risk. It is now a well known fact that a diversified portfolio has always better chances of good returns as it has very low volatility. On the other side if the investment is concentrated in just a few issues, there are chances of higher volatility.



However, Mutual funds extend an automatic diversification of a portfolio. You should always be aware to the fact that your portfolio is not dominated by a fewer funds or stocks.



Obviously, the diversification is not dependent on the number of funds but it heavily depends on the different sectors and different types of funds you have invested in. at the same time you need to strike a fine balance between diversification and over diversification.



Via Morningstar