Question

Let’s assume that there are decreasing returns to scale in mutual funds caused by liquidity problems in scaling. This means that, holding everything else constant, there is a negative relationship between mutual fund size and returns. For which type of mutual fund do you think there is a stronger negative relationship between mutual fund size and performance: a fund that invests in stocks from a large country like the U.S. or a fund that invests in a smaller country like Belgium? Why?

Answer 1

A fund which will invest into a large country like United States will always have high amount of liquidity and it will offer much better exit opportunities to the overall mutual fund investors.

Fund that invest in a small country like Belgium would also be exposed to a whole lot of market risk of losing their portfolio value as this small countries are having a whole lot of volatility associated with them and there are also liquidity risk since these countries are on the verge of continuous default as the credit cycle tighten. they are the most vulnerable countries so one should be investing into funds which invest in United States not Belgium .