Why diversification is good but overdiversification is bad?

[abhik_s]

I have found this advice at various places but have not understood it. By diversification we reduce risk by not putting all our eggs in same basket. This is a very strong argument in favor of diversification.
On the other hand overdiversification is said to make investment complicated since the investor will have to track a lot of funds for their performances. Also some say that this way the investor will have to pay a larger amount of management fees. These are true but still I find the argument for diversification compelling.
If I want to invest Rs4000 in large cap fund, should I choose one good fund or two/three funds? What would you do in such a case? Can you share your views about this issue?

 

[yodlee99]

Good question. If you happen to have 100 funds and if the NAV of 2 of them shoot through the roof, this would hardly have any effect in the returns of your overall portfolio. Remember each fund holds stocks of 100-200 or more companies.
For 4k per month, just pick a equity diversified largecap fund that is also well managed like DSPBR Top 100 or Birla SF Frontline Equity plan A. Or, a safe bet would be a balanced fund like HDFC Prudence or Reliance Reg savings balanced, especially if you are new to MF investments.