By investing in international mutual funds, investors can

i) save any extra transaction and/or information costs they may have to incur when they attempt to invest directly in foreign markets

ii) circumvent many legal and institutional barriers to direct portfolio investments in foreign markets

iii) potentially benefit from the expertise of professional fund managers

Question

By investing in international mutual funds, investors can

i) save any extra transaction and/or information costs they may have to incur when they attempt to invest directly in foreign markets

ii) circumvent many legal and institutional barriers to direct portfolio investments in foreign markets

iii) potentially benefit from the expertise of professional fund managers

BlackTom AI · Accepted Answer

Let’s parse the statement and evaluate each sub-point in turn, keeping in mind what international mutual funds offer to investors.

Option i): 'save any extra transaction and/or information costs they may have to incur when they attempt to invest directly in foreign markets.' This is arguing that pooling through an international mutual fund reduces the per-investor burden of trading in foreign markets. In practice, mutual funds aggregate capital, execute trades on foreign markets collectively, and thus can achieve economies of scale, potentially lowering transaction costs per dollar invested for individual shareholders compared with making direct foreign trades separately. Additionally, fund managers and administrators bear specialized information gathering and trading costs; investors in the fund pay a management fee instead of bearing research and brokerage costs individually. Therefore, this statement has some validity in highlighting cost efficiencies associated with pooled access.

Option ii): 'circumvent many legal and institutional barriers to direct portfolio investments in foreign markets.' Direct investment in foreign markets is typically constrained by regulatory requirements, taxation, restrictions on cross-border ownership, and custody issues. International mutual funds are regulated investment vehicles that operate within the legal framework of their home country and disclosures to investors. While they provide access to foreign markets and can simplify compliance, they do not literally circumvent legal and institutional barriers; they operate under the applicable rules and rely on the fund's compliance and custodial arrangements. Hence this claim is more dubious and can be interpreted as overstating the effect of mutual funds in bypassing regulatory hurdles. Nevertheless, if the course or text frames international mutual funds as enabling access beyond individual investors’ capacity to navigate barriers, some instructors may accept a broader interpretation.

Option iii): 'potentially benefit from the expertise of professional fund managers.' This is a core feature of mutual funds: pooled capital managed by experienced professionals who research, select, and monitor international securities. Investors gain exposure to diversification and expertise without needing to become experts themselves. This aspect is widely regarded as one of the primary advantages of mutual funds, especially for international exposure where local knowledge and currency considerations matter.

Taking these evaluations together, each option presents a facet of what international mutual funds offer: cost efficiencies from scale (i), potential access advantages that bypass some barriers in practice (ii, depending on interpretation), and professional management expertise (iii). The combination i), ii), and iii) aligns with the idea that international mutual funds can provide a blend of cost savings, broader access, and professional oversight, even though the degree to which ii) represents true barrier circumvention can vary by context and regulatory environment. Consequently, selecting all three statements as true reflects the framing used in the provided answer set and encourages students to recognize both the tangible benefits (costs and expertise) and the nuanced view on regulatory barriers when investing through funds.

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