When it comes to mutual funds, the number of stocks they hold can vary widely depending on the fund's strategy and objectives. While some funds may hold only a handful of stocks, others may have dozens or even hundreds in their portfolio. Let's delve into the concept of portfolio diversification in mutual funds and explore whether a fund can have only 10 stocks.

Portfolio diversification is a risk management technique that involves spreading investments across various assets to reduce exposure to any single asset or risk. In the context of mutual funds, diversification is achieved by holding a mix of stocks, bonds, and other securities.

The rationale behind diversification is to minimize the impact of poor performance from any individual investment on the overall portfolio. By investing in a range of assets with different riskreturn profiles, investors can potentially improve the riskadjusted returns of their portfolio.

There is no fixed rule dictating the number of stocks a mutual fund must hold. The number can vary based on several factors:

• Investment Objective: Funds with a specific investment focus, such as sector funds or thematic funds, may have a concentrated portfolio with fewer stocks that align closely with their investment theme.
• Size of the Fund: Larger funds may hold more stocks simply because they have more assets under management and need to deploy capital across a broader range of investments to maintain diversification.
• Investment Strategy: Some funds, particularly actively managed ones, may adopt a concentrated approach, holding a relatively small number of highconviction stocks that the fund manager believes will outperform the market.
• Risk Management: Funds may limit the number of stocks to avoid overexposure to any single company or industry, thereby reducing idiosyncratic risk.

While there's no inherent problem with a mutual fund holding only 10 stocks, it's essential to consider the potential advantages and drawbacks:

Pros:

Cons:

For investors considering mutual funds with a limited number of stocks, it's crucial to:

• Understand the Strategy: Research the fund's investment objective, strategy, and historical performance to determine if its approach aligns with your investment goals and risk tolerance.
• Assess Risk: Evaluate the concentration risk associated with a smaller portfolio size and consider whether you're comfortable with the potential volatility.
• Consider Overall Portfolio Diversification: If investing in a fund with a concentrated portfolio, ensure it complements the diversification of your overall investment portfolio.
• Monitor Performance: Regularly review the fund's performance and portfolio holdings to ensure it continues to meet your investment objectives.

In conclusion, while a mutual fund can certainly have only 10 stocks, investors should carefully weigh the benefits and risks associated with such a concentrated approach. Diversification remains a fundamental principle of prudent investing, and investors should ensure that any investment aligns with their broader financial goals and risk appetite.