Ch.12 · Model Portfolios and Asset Allocation · easy
Why is diversification across mutual fund schemes important in portfolio construction?
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EXPLANATION
Diversification spreads risk across uncorrelated assets or fund categories. Poor performance in one fund or sector has a limited impact on a well-diversified portfolio. However, excessive diversification (holding 20+ similar funds) creates 'diworsification' — adding no real diversification benefit while complicating portfolio management.
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