This study aims to investigate the correlation between the diversification and accruals quality (AQ) in Iran’s mutual funds considering two main hypotheses and four sub-hypotheses. This research investigates the effects of cases such as beta of the company, the company's return on assets, debt ratio of company, firm's size, and accrual quality on the company's cost of capital and considers the effect of mutual funds’ diversification on decreasing information risk calculated through accruals quality in Tehran Stock Exchange (TSE) and Iran Farabourse listed companies. This research investigates 42 mutual funds from 2009 to 2013. Furthermore, the financial data of companies is considered for 20 years up to 2013 in order to calculate the accruals quality. The research results indicate that the factors such as the company's beta, the company's return on assets, and the ratio of firm's debt have direct correlation with cost of capital and this indicates that the increased risk in the form of beta and debt ratio increases the investors' expected return. However, the firm's size is inversely correlated with the cost of capital indicating that the increased firm's size provides the possibility of borrowing and bargaining at lower costs for companies. Furthermore, diversification in mutual funds results in lowering information risk caused by low accrual quality. Accordingly, the result of this research can help the mutual funds’ managers and investment companies to better manage their investments
