Funds that do not own many stocks are often referred to as concentrated (or focused). Many of these funds have only 25 – 50 stocks. While on the other end some funds own upwards of 1,000 stocks.
When you have a concentrated fund you can have higher risk. The more stocks that a fund has the smaller the impact of a bad investment on the overall return. When a fund has 25 stocks and one of them does bad, the impact is bigger on returns than if the fund has 100 stocks.
On the other hand, you can have a less risky portfolio with fewer stocks based on what stocks and what sectors the manager is investing in. Not all concentrated portfolios are risky it depends on their make-up.
When you have a fund that has 250 stocks, you run the risk of the managers not knowing what is going on with each holding. 250 Stocks is a lot of companies to keep up with.
In addition you could still have a highly risky portfolio even with 250 stocks. This comes from that fact that diversity is more than just a large quantity of stocks. You need to have different sectors, different sized companies, different companies, and industries in order to have diversity. I own a health industry mutual fund that has 158 stocks in it. This is not diversified, it only owns one industry. On the other hand I own a mutual fund that has 44 stocks but covers 6 industries in two different capitalization areas – this is diversified!
This is not a black and white issue that you can quickly decide yes you only want concentrated funds. Many factors play into if a concentrated fund is right for you and your portfolio.
Looking at all of these aspects will give you a better idea of how the number of stocks in a portfolio works for you and your needs.