Question

1. How does a mutual fund lower transaction costs through economies of scale?

Answer 1

Ans:- Economies of scale is nothing but the cost advantages that the company or firm gets when they increase the production of the goods. when the firm increases production its costs decrease because the cost is spread over the number of goods whether it is variable or fixed cost or both. when the size of the firm or company is big it takes advantage of the economies of scale by increasing production.

The same concept applies to mutual funds also. In a mutual fund, we know that the portfolio manager invests in a large amount whether in stocks or bonds or any other investment. Therefore in mutual funds, the transaction costs become very less when the heavy amount is invested at a single time as compared to the individual investor, thereby gaining competitive advantage through economies of scale.