I continually get questions wrong concerning mutual fund diversificati...

A lot of people get tripped up on this very point. The difference between the 5 and 10 percent rule is an important difference. The goal of diversification is to reduce risk by spreading investments over many different holdings. Mutual funds are designed to help investors achieve diversifications through a single investment in the fund. Mutual funds that market themselves as diversified funds must adhere to the 75-5-10 rule.  the requirements are as follows:

• 75%: Seventy-five percent of the fund’s assets must be invested in securities of other issuers. Cash and cash equivalents are counted as part of the 75 percent. A cash equivalent may be a Treasury bill or a money market instrument.
• 5%: The investment company may not invest more than 5 percent of its assets in any one company.
• 10%: The investment company may not own more than 10 percent of any company’s outstanding voting stock.

Let's look at an example to help you understand this concept better:
XYZ fund markets itself as a diversified mutual fund. It has $10,000,000,000 in net assets. The fund’s investment adviser thinks that the ABC Company would be a great company to acquire for $300,000,000. Because XYZ markets itself as a diversified mutual fund, it would not be allowed to purchase the company, even though the price of $300,000,000 would be less than 5 percent of the fund’s assets. The investment company must meet both the diversification requirements of 5 percent of assets and 10 percent of ownership in order to continue to market itself as a diversified mutual fund.