Mutual funds can make your job of diversifying across different asset classes and subclasses easier. But they can't do all the work for you. You still have to look at how the funds you're considering work together and fit into your overall portfolio.
For example, you don't want to confuse the number of funds you own with diversification.
If you own six stock mutual funds that all specialize in small-company growth, you're not diversified — even if you're pleased with the results you're getting at the moment.
Similarly, if your large-cap stock mutual fund owns major holdings in the same six blue chip stocks you already own, your portfolio may be too narrowly focused. In this case, a small-company fund would provide greater diversification.
Don Kittell