INDIAN FINANCIAL SYSTEM
Dibrugarh University – Sem 6
- (a) Fill in the gaps:
- Under Section 22 of the RBI Act, the RBI issues notes.
- The bill which does not require any acceptance is called Promissory Note.
- The company which sets up a mutual fund is called Sponsor.
- Sponsoring commercial bank contributes 35% of the total share capital of the Regional Rural Bank. (Govt. of India = 50% , Sponsor banks = 35% and State govt. = 15%)
(b) Write True or False :
(a) Bank deposit is a non-marketable Security.
(b) Government bond is a long-term Security.
(c) Certificate of deposit can be issued only by Commercial bank.
= False, can also be issued by FIs.
(d) Credit card is a prepaid card.
- Write short notes on (any four) :
- Liquidity Management :- Liquidity Management Banks are often evaluate on their liquidity, or their ability to meet cash and collateral obligation without incurring substantial losses. In either case, liquidity management describes the effort of investors or managers to reduce liquidity risk exposure. Liquidity management is significant for any bank because of the following reasons :
- To honour cheque :- Honouring the cheque in exchange of deposit is the key factor of maintaining public confidence. Although in regulation, the bank has to refund all the deposit at once only in the case of current deposit but in practice the customer has the capacity to refund their deposit whenever they need it. This is so because in saving account the customer is provided the facility to withdraw all the amount after fulfilling certain condition. Similarly banks provide the facility of loan in the security of fixed deposit certificate upto 95% of total fixed deposit.
(ii)To Maintain Cash Reserve Ratio :- The bank has to maintain sufficient amount of cash reserve to meet statutory obligation and to maintain minimum safety.
(iii) To meet administrative expenses :- Bank has to pay administrative expenses in various sectors like payment of salary, rent, electricity charge, telephone billing etc.
(iv)To pay bills of exchange :- The use of credit instrument has been substantially increasing when globalization and trade liberalization have increased the volume of trade substantially.
- E-banking :- Over the last few decades technology has changed everything around us including banking. It has made possible internet banking. E-banking is the banking of the new era. Here the customer can do all his banking activities on the internet without physically going to a bank or any human interaction.
All of the bank’s data and the information is stored on servers. So there are services that the bank provides to the customer online and in real time. Customers can see their account statements, transfer fund, apply for loans, pay their bills all online. Hence the phenomenon of e-banking has caught on in the last few years . Almost all banks provide it now.
There are some advantages of e-banking are as follows :-
(i) 24*7 banking is possible.
(ii) The convenience of the customers, who can do most of their daily banking activities from the comfort of their home.
(iii) Provides competitive advantage to the banks.
(iv) Banking is not limited to the branches of the bank, so banks need not invest too much capital in multiple locations.
(c)Merchant bank :- The term ‘merchant banking’ has been used different in different parts of the world. Merchant Banking is a combination of banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service. It helps a business person to start a business.
In other words merchant banking can be defined as a non-banking financial activity resembling banking, originated, grown and sustained in Europe, got enriched under American influence and now being performed all over the world by both banking and non-banking institutions.
There are some advantages of merchant banks are as follows :-
(i) You will receive corporate counselling.
(ii) You will receive honest project feedback.
(iii) You may be able to restructure your capital.
(iv) You receive portfolio management.
(v) You will receive issue management assistance.
(vi) You can receive immediate debt funding through a merchant bank.
(vii) You receive lease financing.
(viii) You are able to protect your IP.
(d)Source of funds of commercial banks :- A Commercial bank is a financial institution that helps community members open checking and saving accounts and manage money marketing accounts.
There are some sources of funds in commercial banks are as follows :-
(1) Period Basis Sources :- On the basis of the period, the different sources of fund can be classified into three parts. Which are :-
(i) Long-term sources fulfil the financial requirements of a business for a period more than 5 years.
(ii) Medium term sources are the sources where the funds are required for a period of more than one year but less than five years.
(iii) Short term sources funds which are required for a period not exceeding one year are called short-term sources.
(2) Ownership Basis Sources :- On the basis of ownership, the sources can be classified into owner’s funds and borrowed funds.
Owners funds means funds which are procured by the owners of a business, which may be a sole entrepreneur or partners or shareholders of a business. It also includes profits which are reinvested in the business.Borrowed funds refer to the funds raised with the help of loans or borrowing. This is the most common type of source of funds and is used the majority of the time.
(3) Generation Basis Sources :- The way of classifying the sources of funds is whether the funds are generated from within the organization or from external sources of the organization. Internal sources of funds are those that are generated inside the business.
External sources of funds are the sources that lie outside an organization, such as suppliers, lenders and investors. When a large amount of money is needed to be raised, it is generally done through the external sources.
(e) Lead Banking :- Lead Banking Scheme (LBS) was introduced in 1969 based on the recommendations of the gadgi committee. It has envisaged assigning the main role of numerous banks (both public sector and private sector) for the allotted districts. A bank which is a relatively large network of branches in rural areas of a given district and is endowed with adequate financial and manpower resources, it is generally assigned the main responsibility of that district.
There are some objectives of lead bank scheme are as follows :-
(i) Eradication of unemployment.
(ii) An appreciable rise in the standard of living for the poorest of the poor.
(iii) Provision of some of the basic needs of the people who belong the poor sections of the society.
There are some role and functions of lead Bank are as follows :-
(i) Review of performance of Bank under annual credit plan.
(ii) The flow of credit to priority sector and weaker sections of the society.
(iii) Grant of educational Loans.
(iv) Progress under SHG- bank linking.
(v) Timely submission of data by banks.
(f) Clearing functions of the RBI :- The main functions of the RBI include : monetary authority: formulates implements and monitors India’s monetary policy, the main objectives of which are maintaining price stability, ensuring adequate flow of credit to productive sectors , and financial stability.
There are some functions of RBI are as follows :-
(i) Issue of Bank Notes :- The Reserve of bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Reserve bank are declared unlimited legal tender through the country.
(ii) Banker to government :- As banker to the government the reserve bank manages the banking needs of the government. It has to – maintain and operate the government’s deposit accounts. It collects receipts of funds and makes payments on behalf of the government.
(iii) Custodian of cash Reserve of commercial Banks:- The commercial banks hold deposits in Reserve bank and the letter has the custody of the cash reserve of the commercial banks.
(iv) Lender of Last Resort:-The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
(v) Central clearance and Account Settlement :- Since, Commercial banks have their surplus cash reserve deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.
3. (a) Give an overview of the Indian Financial System.
The Financial system of a country is an important tool for economic development of the country , as it helps in creation of wealth by linking savings with investments. It facilitates the flow of funds from the households (savers)
to business firms (investors) to aid in wealth creation and development of both the parties.
Features of financial system are as follows:-
(i) It plays a vital role in economic development of a country.
(ii) It encourages both savings and investment.
(iii) It links savers and investors.
(iv) It helps in capital formation.
(v) It helps in allocation of risk.
(v) It facilitates expansion of financial markets .
(vi) It aids in financial Deepening and Broadening
Structure of Indian financial system/components of Indian Financial system :-
(i) Financial Institutions :- Financial Institutions are intermediaries of financial markets which facilitate financial transactions between individuals and financial customers.
It simply refers to an organization (set-up for profit or not for profit) that collects money from individuals and invests that money in financial assets such as stocks, bonds, bank deposits, loans etc.
There are two types of Financial Institutions :-
(a) Banking Institutions :- These are banks and credit unions that collect money from the public in return for internet on money deposit and use that money to advance loans to financial customers.
(b) Non-Banking Institutions :- These are brokerage firms, insurance and mutual funds companies that cannot collect money deposit but can sell financial products to financial customers.
(ii) Financial markets :- It refers to any marketplace where buyers and sellers participate in trading of assets such as shares, bonds, currencies and other financial instruments. A Financial market may be further divided into capital market and money market. While the capital market deals in long term securities having maturity period of more than one years, the money market deals with short-term debts instruments having maturity period of less than one year.
(iii) Financial Assets/Instruments :- Financial assets include cash deposits, checks, loans, accounts receivable, letter of credit, bank notes and all other financial instruments that provide a claim against a person/financial institution to pay either a specific amount on a certain future date or to pay the principal amount along with interest.
(iv) Financial Services :- Financial Services are concerned with the design and delivery of financial instruments and advisor services to individuals and businesses within the area of banking related institutions, personal financial planning, leasing, investment, assets, insurance etc.
There are some functions of Indian Financial System are as follows :-
(i) It bridges the gap between savings and investment through efficient mobilization and allocation of surplus funds.
(ii) It helps a business in capital formation.
(iii) It helps in minimising risk and allocation risk efficiently.
(iv) It helps a business to liquidate tied up funds.
(v) It facilitates financial transactions through provision of various financial instruments.
There are some importance of Indian financial system are as follows :-
(i) It aids in increasing the national output of the country by providing funds to corporate customers to expand their respective business.
(ii) It protects the interests of investors and ensures smooth financial transactions through regulatory bodies such as RBI, SEBI, etc.
(iii) It helps economic development and raising the standard of living of people.
(iv) It helps to promote the development of weaker section of the society through rural development banks and co-operative societies.
(v) It helps corporate customers to make better financial decisions by providing effective financial as well as advisory service.
(B) Discuss about the major reforms undertaken in the Indian Financial system during post – liberalization period.
Economic Reforms in Indian Financial System since 1991
The Indian Government has introduced many Economic Reforms in India since 1991. In 1990-91 India had to face grave economic problem. India was facing serious deficiency in her foreign trade balance and it was increasing. Since 1987-88 till 1990-91 it was increasing in such a rapid scale that by the end of 1990-91 the amount of this deficit balance became 10,644 crores of rupees.
At the same time the foreign exchange stock was also decreasing. In 1990 and 1991 the government of India had to take huge amount of loan from the IMF as compensatory financial facility. Even by mortgaging 46 tons of gold it had taken short term foreign loan from the Bank of England.
At the same time India was also suffering from inflation, the rate of which was 12% by 1991. The reasons of the inflation were the increase in the procurement price of the agriculture products for distribution, the increase in the amount of monetized deficit in the budget, increase of import cost and decrease in the rate of currency exchange and Administered price like. Thus she was facing trade deficit as well as Fiscal Deficit.
To get relief from such a grave problem the government of India had only two ways before it to take foreign debt and to create favourable conditions within the country for increasing the flow of foreign exchange and also to increase the volume of export. The other was established fiscal discipline within the country and to make structural adjustment for the purpose.
Hence the government of India had to introduced a package of reforms which include:
(a) To liberalize the industrial policy of the government and to invite foreign investment by privatization of industries and abolishing the license system as part of that liberalization.
(b) To make the import- export policy of the country more liberal and so that the export of Indian goods may become more easy and necessary raw materials and instruments for both industrial development and production of exportable commodities may be imported and also to facilitates free trade by reducing the import duty.
(c) To decrease the value of money in term of dollar.
(d) To establish market economy by withdrawing and restricting government interference on investment.
(e) To reform the banking system and the tax structure of the country.
The main objectives of the new fiscal policy are, however, to establish economic structural adjustment at the first stage and then to establish market economy by removing all controls and restriction on it. There are two phase in the structural adjustment phase, the stabilization phase where all government expenditure are reduced and the banks are the restricted on creating debt. The second phase in the structural adjustment phase where the production of exportable good and the alternative of Import goods are increased and at the same time reducing governmental interference in Industry, the management skill and productive capacity of the industries are increased through privatization.
Thus, the new fiscal policy has introduced three significant things Deregulation, Privatization and Exit Policy. Excepting 15 important industries all other industries have been made free from license system. To encourage foreign investment its highest limit has been increased upto 51% 38 industries have been made open for foreign investment like the metal industry, Food Processing industry, Hotel and tourism industry etc.
The Economic liberalized have helped Indian to grow at faster pace. The per-capita GDP of India have increased, which is a sign of growth amd development.
Thus, the new economic policy is taking India towards liberal economy or market economy. It has relieved India much of her hardship that she faced in 1990-1991.
(a) Discuss the recent development that have taken place in the activities of commercial banks, what challenges do they face from the private sector banks ?
=The role of Banks India has changed a lot since economic reforms of 1991. These changes came due to LPG, i.e. liberalization, privatization and globalization policy being followed by GOI. Since the traditional and out dated concepts , practices, procedures and methods of banking have changed significantly. Today, banks in India have become more customer focused and services-oriented than they were before 1991.They now also give a lot of importance to their rural customers. They are even willing ready to help them and serve regularly the banking needs of country side India. The changing activities of commercial banks are depicted below:-
(i) Better customer service :- Before 1991, the overall service of banks in India was very poor. In those days, some bank staffs were very rude to their customers. However, all this changed remarkably after India economic reforms of 1991.
Banks in India have now become very customer and service focus. Their service has become quick, efficient and customer friendly.
(ii)Foreign currency exchange :-Banks deal with foreign currencies. Astherequirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the International trade.
(iii) Consultancy :-Modern commercial banks are large organizations. They can expand their function to consultancy business. In this function, banks hire financial , legal and market experts who provide advice to customers in regarding investment, industry trade ,Income tax etc.
(iv) Bank guarantee :– when customer have to deposit certain fund in governmental offices or courts for a specific purpose, a bank can present itself as the guarantee o the customer, instead of depositing fund by customers.
(v) Bank on wheels :– The ‘Bank on wheels’ scheme was introduced in North-East Region of India . under this scheme, banking service are made accessible to people staying in far- flung (remote) areas of India. This scheme is a generous attempt to save banking needs of rural India.
(vi) credit cards :– A credit cards is a card that allow their holders to Make purchases of goods and services in exchange for the credit card’s provider immediately paying for the goods or services, and the card holder promising to pay back the amount of the purchase to the card provider over a period of time and with interest.
(vii) ATM service :– Key advantages of ATM’s include :-
(b) Elimination of labour cost
(c) Convenience of location
(viii) Debit card :-Debit cards are used to electronically withdraw funds directly from the card holder’s accounts. Most debit card require a personal Identification number (pin) to be used to verify the transaction.
(ix) Home banking :– Home banking is the process of completing the financial Transaction from one’s own home as opposed to utilizing a branch of a bank.
(x) Online banking :- Online is a service offered by banks that allows account holders to access their account data via the internet. Online banking is also known as “Internet Banking” or “Web Banking”.
(xi) Mobile banking :- Mobile banking (also known as M-banking) is a term used for performing balance checks, account transactions payments and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA).
(xii) Accepting deposit :- Accepting deposit from servers or account holders in the primary function of a bank. Banks accept deposit from those who can save money but cannot utilize in profitable sectors.
(xiii) Priority banking :- Priority banking can include a number of various services, but some of the popular ones include free checking, online bill pay, financial consultation, and information.
(xiv) Private banking :- Personalized financial and banking services that are traditionally offered to a bank’s rich, High Net Worth Individuals (HNWI’S).
Challenges to Public Sector banks from Private sector banks.
The Staggering amount of bad loans in merely the tip of the iceberg. The bigger worry is the rapid loss of market share to Private sector competitors. In the past year, Private banks accounted for a whopping 68% share of new loans; as a result the market share of public sector banks is expected to decline to 60% or even less within the decade.
The fundamental reason for this is the lack of competitiveness and differentiation. One respected deputy governor of the Reserve Bank of India recently admitted that there is little to differentiate one bank from another besides the signboard.
Navigation and surviving a perfect storm requires clarity and decisiveness. In every business, banking has become a knowledge and technology intensive enterprise. Banking now requires incredible depth in areas such as risk management, project, evaluation, treasury, credit evaluation, fraud detection.
(b) Discuss about the organization and management of RBI.
= The Reserve Bank of India (RBI) is India’s central bank. The RBI controls monetary and other banking policies of the Indian government. The RBI was established on April 1, 1935, is accordance with the Reserve Bank of India Act, 1934. The Reserve Bank is permanently situated in Mumbai since 1937.
Organization of RBI
Central Board of Directors
Principal Chief General Managers
Chief General Managers
Deputy General Managers
Assistant General Managers
The Reserve Bank was set up as corporate body. The organizational structure of the Reserve Bank is provided by the Reserve Bank of India Act, 1934. It comprises of the –(a) Central Board and (b) Local Boards.
(a) Central Board :- The Central Board of directors is the supreme governing body of the bank. It consists of 20 members. The members include the following :-
(i) A Governor and not more than for Deputy Governors to be appointed by the central government.
(ii) Four Directors to be maintained by the Central Governors, one each from the four local boards.
(iii) Ten Directors to be nominated by the Central Government. They are experts from the field of business, industry, finance and co-operation.
The power of the board vests with the governor who is the chief Executive office of the Bank. The governor has the responsibility of directing the affairs and business of the bank. The Governor and Deputy Governors hold office for a period of 5 years and are eligible for the reappointment.
(b) Local Boards :- A part from Central Board of Directors, four Local Boards are constituted representing each area specified in the first schedule to the Act. There is a Local Board in Eastern, Western, Northern and southern regions of the country with headquarters at Kolkata, Mumbai, New Delhi and Chennai.
Local Board consists of five members, each appointed by the central Government. The members of the Local Board hold office for a period of four years and are eligible for reappointment.
The Local Board carry out the functions of advising the Central Board on such matter of local importance as may be generally or specifically referred to it or perform such functions as may be delegated to it from time to time. Generally a Local Board deals with the management of regional commercial transactions.
(a) Define money market. Explain the different sub-markets of money market.
= The money market is a market for short term, i.e. less than one year. It is a short term loan or financial assets. It was a market for the lending and borrowing of short term funds. In the money market we deal not in money but near money assets i.e. the assets which are used as credit instruments are known as “ near money assets”.
The money market is not a place but an activity, the transactions are carried out by telephone, mail, etc. among people who may have never met one another. Almost all big cities have local money markets, say in Bombay there is a Bombay money market, in New York, there is the New York money market and in London there is the London money market.
The following are the general features of a money market :-
(i) It is market purely for short-term funds or financial assets called near money.
(ii) It deals with financial assets having a maturity period upto one year only.
(iii) It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.
(iv) Transactions have to be conducted without the help of brokers.
There are some different sub-markets or Components of money market are as follows :-
Collateral Loan Market
Call Money Market
(i) Call Money Market :-It is an important sub market of the Indian money market. It is also known as money at call and money at short notice. It is also called inter bank loan market. In this market money is demanded for extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the industrial and commercial locations such as Mumbai, Delhi, Calcutta etc. These transactions help stock brokers and dealers to fulfil their financial requirements. Call loans are useful to the commercial banks because these can be converted into cash at any time. They are almost like cash. It is a form of secondary cash reserves for the commercial banks from which they earn some income too.
(ii) Collateral Loan Market :- It is another specialised sector of the money market. The market for loans secured by stocks and market is geographically most diversified and most loosely organised. The loans are generally advanced by the securities, stock and bonds. The Collateral money is returned to the borrowed when the loan is repaid. Once the borrowed is unable to repay the loan, the collateral becomes the property of the lender. These loans are given for a few months.
(iii) Acceptance Market :- Acceptance market refers to the market for banker’s acceptances involved in trade transactions. This market deals with banker’s acceptances which may be defined as a draft drawn by a business firm upon a bank and accepted by it.
The market where the banker’s acceptances are easily sold and discounted is known as acceptance market.
(iv)Bill Market :- It is a market in which short form papers are bills are bought and sold. The importance types of short term papers are :- (a) Bills of exchange
(b) Treasury bills
(a) Bill of exchange :-Bills of exchange are commercial papers. A bill of exchange is a written unconditional order which is signed by the drawer requiring the drawer to pay on demand or at a fixed future time, a definite sum of money.
(b) Treasury money :-The treasury bills are government papers securities for a short period usually of 91 days duration. The treasury bills are the promissory notes of the government to pay a specified sum after a specific period. These are sold by the central bank on behalf of the government. An importance aspect of a treasury bill is that there is no fixing of rate of interest before hand.
Thus from the above discussion it is clear that different markets from part of money all these four sub- markets from the money market.
(b) What is secondary market? Distinguish between primary market and secondary market .
= A secondary market is a marketplace where already issued securities – both shares and debt can be bought and sold by the investors . So, it is a market where investors buy securities from other investors, and not from the issuing company.
There are some features of secondary market are as follows :-
(i) Gives liquidity to all investors. Any seller in need of cash can easily sell the security due to the presence of large number of buyers .
(ii) Lower transaction costs due to the high volume of transactions.
(iii) Demand and supply economics in the market assist in price discovery.
(iv) An alternative to saving.
(v) Secondary markets face heavy regulations from the government as they are a vital source of capital formation and liquidity for the companies and the investors.
The distinguish between primary market and secondary market are as follows:-
Pri Primary Market
Seco Secondary Market
Primary market is a market where new securities are issued in the market for the first time, either by existing company or new company.
Secondary market is a market where already issued, existing securities are traded on stock exchange.
(ii) Regulatory Authority
Activities in primary market is governed by SEBI and companies Act.
It is regulated by laws of stock exchanges and SEBI.
(iii) Price fluctuation
Price of securities is fixed.
Price of securities keep fluctuating because of demand and supply forces.
(iv) Involvement of companies
Companies are directly involved as shares are sold by companies directly to public.
There is no involvement of companies.
(v) Type of companies
All types of companies can issue new shares whether listed or unlisted.
In secondary market, shares of only listed companies are bought and sold.
(vi) Geographical location
There is no fixed geographical location for new issue market. The issue companies may have offices at different location.
The location of a stock exchange is fixed at a specific place. E.g. NSE is situated in Mumbai.
(vii) Buying and Selling between
The securities are sold by companies and bought by public. So buying and selling is done between company and public.
Buying and selling is done among investors only.
(viii) Price determination
When securities are issued for first time in primary market, the Price of securities is determined by company itself.
Prices of securities is determined by demand and supply forces in the stock exchange.
(ix) Financing to companies
Through Primary market funds are raised for financing companies for their expansion and diversification.
No found is raised for company. Only buying and selling of securities is done among investors.
(a) Explain the different types of mutual Fund Schemes in India.
A mutual Fund is a kind of investment that uses money from investors to invest in stocks, bonds or other types of investment. Mutual Funds are usually “Open ended”, meaning that new investors can join into the fund at any time.
There are thousands of different kinds of mutual funds, specializing in investing in different countries, different types of business, and different investment styles.
There are different types of mutual Fund Schemes in India are as follows :-
A. According to ownership
According to ownership, mutual funds in India may be classified as (i) Public Sector mutual funds and (ii) Private Sector Mutual Funds.
(i) Public Sector Mutual Funds :- Unit Trust of India (UTI) has been functioning in the arena of mutual fund business in India since 1963-64. SBI mutual fund was the first among all the public-sector commercial bank that started operations during November 1987. There after a number of public sector organization like IND Bank-MF, CAN Bank-MF ,BOI-MF, PNB-MF, etc have joined in the mutual fund business n a short span of time.
(ii) Private Sector Mutual Funds :- Seeing the success and growth of Mutual Funds in the Indian capital market, the government of India allowed the Private sector corporates to join the Mutual fund Industry on February 14, 1994. Since then, a number of Private sector companies have approached SEBI for permission to set up private mutual funds, SEI (MF) Regulations, 1996 provide guidelines for registration, constitution, management and schemes of MF.
B. According to scheme of operation
(i) Open ended Schemes/Funds :- Open ended scheme means a scheme of mutual funds which offers units for sale without specifying any duration for redemption. These scheme of not have a fixed maturity and entry to the fund is always open investor who can subscribe it any time. Open ended funds provide better liquidity to Investors.
(ii) Close-Ended Schemes/Funds :- A close-ended scheme means any scheme of mutual fund in which the period of maturity of the scheme is specified.
(iii) Interval Scheme/Funds :- An interval scheme is a scheme of mutual fund which is kept open for a specific interval and after that is operates as a close scheme.
C. According to Portfolio
(i) Income Funds :- These funds aim at providing maximum current return/income to the investors. There may be income funds of two types; some funds may concentrate on low risk, constant returns while others, may aim at maximum return event at the cost of some risk.
(ii) Growth Funds :- These funds aim at providing capital appreciation in the value of investment. Growth funds concentrate on value appreciation of securities and not on the regularity of income and are also known as ‘Nest eggs’ or ‘Long haul’ investment.
(iii) Balanced or Conservative Funds :- Balanced funds spend both on common stock are preferred stock. These funds are also known as ‘Conservation Funds’ or ‘Income and Growth Funds’.
(iv) Stock/ Equity Funds :- These funds invest in shares of the companies, Stock funds may have further sub-divisions such as Income funds and growth funds. A special type of Equity fund is known as ‘index fund’ or never beat market fund’.
(v) Bond Fund :- These funds employee their resources in bonds. These investments ensure fixed and regular income. These investments ensure a fixed amount to the company and some amount will be paid by the subscriber also.
(vi) Specialise fund :- These funds invest in a particular type of securities. The fund may specialise in securities of companies dealing in a particular product, firm in a particular industry or of certain income producing securities.
(vii) Leverage Funds :- The Primary aim of Leverage funds is to maximise Capital appreciation. The cost of raising loaned funds and the gain from holding shares is the profit of the leverage fund. The leverage is used to the benefit of the shareholders.
(viii) Taxation Funds :- Mutual funds may be designed to suit the tax Payers. The contributors to such funds get some concession in income tax. Generally Income tax prayers contribute in this funds.
(ix) Money Market Mutual Funds (MMMF) :- ‘Money market mutual fund’ means a scheme of a mutual fund which has been set up with the objective of investing exclusively in money market instruments. These instruments include treasury bills, dated governments securities with an unexpired maturity of upto one year, call and notice money, commercial paper, commercial bills accepted by banks and certificates of Deposits.
(D) According to location :-
(i) Domestic fund :-These are the funds which mobilise savings of people within the country where investments are made.
(ii) Off- share funds :-Off- share funds are those which raise or mobilise funds in countries other where investments are to be made. These funds attract foreign savings for investment in India .
(E) Other types of mutual funds :- In these mutual funds, there can be other types of mutual funds also, such as, ‘Loan funds’ and’ Non-Loan funds’ based upon the expenses/ fees to be charged, ‘Hub and spoke Funds’ which are basically fund of funds, etc.
(b) How does SEBI protect the interest of investors ? Explain.
Securities exchange Board of India (SEBI) was set up in 1998 to regulate the functions of securities market . SEBI promotes orderly and healthy development in the stock market transactions.It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling them. As a result in may 1992, SEBI was granted legal status . SEBI is a body corporate having a separate legal existence and perpetual succession.
There are some purpose and role of SEBI are as follows :-
SEBI was a set up with the main purpose of keeping a check on malpractices and protest the interest of investors. It was set up to meet the needs of three groups .
(i) Issues :-For issuers it provides a market place in which they can finance fairly and easily.
(ii) Investors :-For investors it provides protection and supply of accurate and correct information. (iii)Intermediaries :- For intermediaries it provides a competitive professional market.
Some objective of SEBI are as follows :-
(i) To regulate the activities of stock exchange .
(ii)To protect the right of investors and ensuring safety to their investment.
(iii)To prevent fraudulent and malpractice by having balance between self regulation of business and its statutory regulations.
iv)To regulate and develop a code of conduct for intermediaries such as brokers, underwriters etc.
SEBI has three important functions these are :-
(i) Protective function
(ii) Development function
(iii) Regulatory function
Protective functions are performed by SEBI to protect the interest of investors and provide safety of investment . As protective functions SEBI perform following functions:-
(i) It check price rigging :- Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practice because this can defraud and cheat the investors.
(ii) It prohibits Insider trading :-Insider is any person connected with the company such as directors, promoters etc. These insiders have sensitive information which affect the price of the securities. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and unfair trade practice :-SEBI does not allow the companies to male misleading statements which are likely to induce the sale or purchase of securities by any other person.
(iv)SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in securities market by taking following steps.
(a)SEBI has issued guidelines to protect the interest of debenture –holders where in companies cannot change terms in mid- term.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.