The portfolios of mutual fund are diversified, this will increase the overlap of assets and the risk relationship between mutual funds. In here, we choose 100 Taiwan’s equity funds to exam the relationship between the diversification and risk relationship from 2001 to 2010. We measure risk based on the GARCH model and use Herfindahl index to observe diversification. The results showed that there were a highly positive risk relationship and a high degree of asset diversification among equity funds. It was found that the diversification had significantly negative impact on the risk relationship. Besides, the risk relationships have more choices to be negative during the period of economic recession. In spite of different conditions of business cycle, the diversification had significantly negative influence on the risk relationship.
