What does "over-concentrated risk" refer to in a mutual fund?

"Over-concentrated risk" in a mutual fund refers specifically to the situation where the fund has a heavy investment in a single sector or asset class. This concentration can lead to higher vulnerability to adverse conditions affecting that specific sector or asset. For example, if a mutual fund is predominantly invested in technology stocks, it may face significant losses if the technology sector experiences a downturn.

Diversification is a key principle in investment because it helps manage risk by spreading investments across different sectors and asset classes. When a fund is over-concentrated, it lacks this diversification and exposes investors to increased risk, particularly if the concentrated sector performs poorly.

In contrast, the other options represent different types of risks that do not specifically pertain to concentration. While asset class diversity reduces risks associated with the first option, market volatility impacts all investments regardless of how concentrated they are. Additionally, foreign exchange fluctuations relate to investments in international assets rather than the concentration of investments in a single sector. Thus, the emphasis of over-concentrated risk is specifically on the drawbacks of heavy reliance on a limited number of investments.