INDIAN FINANCIAL SYSTEM 2018 – SOLVED QUESTION PAPER – DIBRUGARH UNIVERSITY – Semester 6 – B.Com

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INDIAN FINANCIAL SYSTEM-DIBRUGARH UNIVERSITY-2018 SOLVED PAPER-B.COM-6th Semester

1. Fill in the blanks:                                          1×4=4

a)      Under Section _22_ of the RBI Act, the RBI issues notes.

b)      Indian financial system comprises of both organized and _unorganised____ sector.

c)       Demonetization has been implemented for __two___ times in India till today.

d)      ___RBI__ acts as a lender of last resort in Indian banking system.

2. State whether the following statements are True or False:                                      1×4=4

a)      Non-banking assets and non-performing assets are synonymous terms. False

b)      Money market deals with short-term investible fund. True

c)       IDBI accepts deposits from the public. False

d)      Price stability is an objective of monetary policy of RBI. True

3. Write short notes on (any four):                           4×4=16

a)      Mutual Fund.

b)       Treasury Bill.

c)       New Issue Market.

d)      Merchant Banking.

e)      Marketable and Non-marketable Securities.

f)       Securities Exchange Board of India.

a)      Mutual Fund

When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in equity securities already held by investors, they are transferring ownership of the securities among investors.

By pooling individual investors’ small investments, mutual funds enable them to hold diversified portfolios (combinations) of debt securities. They are also beneficial to individuals who prefer to let mutual funds make their investment decision for them. The returns of investors who invest in mutual funds are tied to the return earned by the mutual funds on their investments.

Money market mutual funds and bond mutual funds determine which debt securities to purchase after conducting a credit analysis of the firms that have issued or will be issuing debt securities.

Stocks that satisfy their specific investment objective (such as growth in value or high dividend income) and have potential for a high return, given the stock’s level of risk.

Because mutual funds typically have billions of dollars to invest in securities, they use substantial resources to make their investment decisions. In particular, each mutual fund is managed by one or more portfolio managers, who purchased and sold securities in the fund’s portfolio. These managers are armed with information about the firms that issue the securities in which they can invest.

b)Treasury Bill

Treasury Bills, also known as T-bills are the short-term money market instrument, issued by the central bank on behalf of the government to curb temporary liquidity shortfalls.

These do not yield any interest, but issued at a discount, at its redemption price, and repaid at par when it gets matured.

Treasury bill is a monetary policy instrument through which the government raises funds for short period requirements and commercial banks invest their short period surpluses by buying these bills from the government.

These are the safest investment instruments of its category, as the risk of default is negligible. Further, the date of issue is predetermined, as well as the amount is also fixed.

Types of Treasury Bills

At present there are 4 types of auctioned T-bills, which are:

91 days T-bills: The tenor of these bills complete on 91 days. These are auctioned on Wednesday, and the payment is made on following Friday.

182 days T-bills: These treasury bills get matured after 182 days, from the day of issue, and the auction is on Wednesday of non-reporting week. Moreover, these are repaid on following Friday, when the term expires.

364 days T-bills: The maturity period of these bills is 364 days. The auction is on every Wednesday of reporting week and repaid on the following Friday after the term gets over.

14 days T-bills: These treasury bills get matured after 182 days. These are only issued to the State government.

c) New Issue Market

The new issue market represents the primary market where new securities, i.e shares or bonds that have never been previously issued, are offered.The new issue directs the flow of savings into long-term investors, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprise, to a great extent, depends upon the status of the new issue market of the country.

New issue market deals with the new securities which were not previously available to the investing public, i.e., the securities that are offered to the investing public for the first time. The market, therefore, makes available a new block of securities for public subscription.

Characteristics of new issue market (NMI)

(1)It is the market for the new long term capital.

(2)Here the securities are issued by the company for the first time directly to the investors.

(3)On receiving the money firm the new issues, the company will issue the security certificates to the investors.

(4)The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures.

(5)External finance for longer term loans from financial institutions is not included in the new issue market. There is an option called ‘going public’ in which the borrowers in the new issue market raise capital for converting private capital into public capital.

(6) The financial assets sold can only be redeemed by the original holder of security.

d )Merchant Banking:

The term ‘merchant banking’ has been used differently 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.

e)      Marketable and Non-marketable Securities.

Marketable Securities

Stocks, bonds or any other types of securities which can be traded easily in organized financial markets or between two investors with the help of brokers, are known as marketable securities. The chief feature of marketable securities is that it is easier to trade them and they can be converted into cash whenever required by the investor. The marketable securities are classified into four types- money market securities, capital market securities, derivatives, and indirect investments.

Non-marketable securities

Securities that are difficult to trade in a normal financial market are generally called non-marketable securities. It is difficult to get a potential buyer for non-marketable securities and hence, some of the financial instruments that comprise non-marketable securities are traded in private transactions. Although these securities can’t be traded easily, they form a significant portion of an investor’s portfolio. These securities are traded between investors and large financial institutions like commercial banks, so it is a risk-free and safe investment. Different types of these securities are as follows.

f)       Securities Exchange Board of India.

 

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.

4. a) What is the financial system? Discuss the elements of Indian financial system.                       2+12=14

Same as 3(a)

Or

b) Discuss the major reforms in Indian financial system during the post-liberalization period.                                14

 

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 problems. India was facing serious deficiency in her foreign trade balance and it was increasing. From 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 a huge amount of loan from the IMF as a compensatory financial facility. Even by mortgaging 46 tons of gold it had taken a 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 to establish fiscal discipline within the country and to make structural adjustments 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 facilitate free trade by reducing the import duty.

(c) To decrease the value of money in terms of dollar.

(d) To establish a 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 restrictions on it.

There are two phases in the structural adjustment phase, the stabilization phase where all government expenditure is reduced and the banks are restricted on creating debt. The second phase is the structural adjustment phase where the production of exportable goods 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.

5. Explain the credit creation process of the commercial banks. Mention its limitations. 10+4=14

Ans: The commercial banks perform a no. of functions. Among these, credit creation is quite important. The power of C.B to expand deposit through expanding their loans and advances is known as credit creation .

It is true that a bank cannot lend more than what it has got but it is also true that what is lent out by a bank may come back to the same bank. By way of new deposits which may again be lent out and soon deposit becoming the basis for a loan or investments, which again returning to the bank as fresh deposit becoming the basis for a new loan on so on. A modern bank creates deposits in two ways .

Firstly, in a passive way which results in primary or passive deposits and Secondly, in a more action way which results in active or derivative deposits.The process of credit creation by commercial banks is eplained as follows: (with the help of an example).

Suppose ‘A’ deposit Rs. 10,000 in a bank X, which is the primary deposit of the bank. The cash reserve requirement of the Central Bank is 10%. Then, bank X will keep Rs. 1000 as reserve with the Central Bank and will lend remaining Rs. 9000 to needy borrowers.In other words, the bank X does not give B cash while sanctioning the loan. Instead the bank merely opens a loan account in the name of B and credits to his account Rs. 9000. Then B pays to C, to whom he owes Rs. 9000, by way of cheque to settle his account with C.

C now deposits the cheque of Rs. 9000 in Y bank. The bank Y, after keeping a sum of Rs. 900 as CRR requirement of the Central Bank, lends Rs. 8100 to another borrower D. Thus, this process of deposits and credit creation continues till the reserves with commercial banks becomes zero.

Hence, the bank gets new deposit from the loan given and actively creates this new deposit. Thats is why it is always said that loans create deposits. The new deposit created in this manner will add to the money stock of the economy. Whenever the loan is returned by the borrower to the bank, then there is no further possibility of creating new deposit. This results in net decrease in money stock

Its limitations are:

Amount of Cash: The first Important factor on which the extent of credit creation depends is the amount of cash. Which commercial banks possess. The large the amount of cash which C.B possess, the large amount of cash with the banking system, the greater will be the excess funds &hence larger will be the credit creation by the bank.

If the volume of currency in circulation increases, the volume of primary deposits will also corresponding increase, enabling the Commercial Banks to create a larger volume of derivative deposits.

Cash reserve rate : if bank have to keep small amount in the form of cash reserve , their power of create credit will be more. The large the ratio of cash reserves to the total deposits, the lesser will be the power of the banks to credit. In sum, credit creation is the reciprocal of the C R. Ratio.

External Drain: the external drain refers to cash withdrawal from the banks by the borrowed. The C.B expands their credit creation on the basis of the excess reserves with them.

Some of the borrowers from the bank are likely to withdraw part of their deposits in currency. Every rupee in cash that is withdrawn from the banking system lowers the reserves of the bank and thus checks further deposit expansion.

Business Condition: during the period of business prosperity, demand for loans & advances by the business community is more. Therefore the power of the banks to create credit will increase. Likewise during depression , the demand for loans & advances is less the reform the credit creation power of the banks also diminishes.

Or

Justify the need of a Central Bank in the financial system of India.

A Central Bank is a bank which constitutes the apex of the monetary and banking structure of its country and which performs as best as it can in the national economic interest. The

Need for Central Bank

Central Bank is required in our country for the following reasons:

1. Regulator of Currency:

The central bank is the bank of issue. It has the monopoly of note issues. Notes issued by it circulate as legal tender money. It has its issue department which issues notes and coins to commercial banks. Coins are manufactured in the government mint but they are put into circulation through the central bank.

Central banks have been following different methods of note issue in different countries. The central bank is required by law to keep a certain amount of gold and foreign securities against the issue of notes. In some countries, the amount of gold and foreign securities bears a fixed proportion, between 25 to 40 per cent of the total notes issued.

The monopoly of issuing notes vested in the central bank ensures uniformity in the notes issued which helps in facilitating exchange and trade within the country. It brings stability in the monetary system and creates confidence among the public. The central bank can restrict or expand the supply of cash according to the requirements of the economy. Thus it provides elasticity to the monetary system. By having a monopoly of note issue, the central bank also controls the banking system by being the ultimate source of cash. Last but not the least, by entrusting the monopoly of note issue to the central bank, the government is able to earn profits from printing notes whose cost is very low as compared with their face value.

2. Banker, Fiscal Agent and Adviser to the Government:

Central banks everywhere act as bankers, fiscal agents and advisers to their respective governments. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of governments. But it does not pay interest on governments deposits. It buys and sells foreign currencies on behalf of the government.

It keeps the stock of gold of the government. Thus it is the custodian of government money and wealth. As a fiscal agent, the central bank makes short-term loans to the government for a period not exceeding 90 days. It floats loans, pays interest on them, and finally repays them on behalf of the government. Thus it manages the entire public debt. The central bank also advises the government on such economic and money matters as controlling inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of payments, etc.

3. Custodian of Cash Reserves of Commercial Banks:

The central bank keeps and manages the foreign exchange reserves of the country. It is an official reservoir of gold and foreign currencies. It sells gold at fixed prices to the monetary authorities of other countries. It also buys and sells foreign currencies at international prices. Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies.

It holds these rates within narrow limits in keeping with its obligations as a member of the International Monetary Fund and tries to bring stability in foreign exchange rates. Further, it manages exchange control operations by supplying foreign currencies to importers and persons visiting foreign countries on business, studies, etc. in keeping with the rules laid down by the government.

4. Lender of the Last Resort:

The central bank lends to such institutions in order to help them in times of stress so as to save the financial structure of the country from collapse.

It acts as lender of the last resort through discount house on the basis of treasury bills, government securities and bonds at “the front door”.

6. Clearing House for Transfer and Settlement:

As bankers’ bank, the central bank acts as a clearing house for transfer and settlement of mutual claims of commercial banks.

Since the central bank holds reserves of commercial banks, it transfers funds from one bank to other banks to facilitate clearing of cheques. This department is known as the “clearing house” and it renders the service free to commercial banks.

When the central bank acts as a clearing agency, it is time-saving and convenient for the commercial banks to settle their claims at one place. It also economises the use of money. “It is not only a means of economising cash and capital but is also a means of testing at any time the degree of liquidity which the community is maintaining.”

6. Controller of Credit:

The most important function of the central bank is to control the credit creation power of commercial banks in order to control inflationary and deflationary pressures within this economy.

For this purpose, it adopts quantitative methods and qualitative methods.

Quantitative methods aim at controlling the cost and quantity of credit by adopting bank rate policy, open market operations, and by variations in reserve ratios of commercial banks.

Qualitative methods control the use and direction of credit. These involve selective credit controls and direct action. By adopting such methods, the central bank tries to influence and control credit creation by commercial banks in order to stabilise economic activity in the country.

6. Discuss the services provided by merchant banks in Indian capital market.                

 

Ans: Merchant banks in Indian capital      

1. Corporate Counselling:

This service is, usually, provided free of charge to a corporate unit. Merchant bankers render advice to corporate enterprises from time to time in order to improve performance and build better image/reputation among investors and to increase the market value of its equity shares. Counselling is provided in the form of opinions, suggestions and detailed analysis of corporate laws as applicable to the business unit.

2. Project Counselling:

Project counselling broadly covers the study of the project and providing advisory services on the project viability and procedural steps to be followed for its implementation.

It covers the following aspects:

(i) Development of an idea of a project or review of the project idea/project profile.

(ii) Preparation of project report after considering its financial, economic and market feasibility.

3. Capital Restructuring Services:

Merchant banks render different capital restructuring services to the corporate units depending upon the circumstances a particular unit is facing.

It may include the following services:

(i) Examination of the capital structure of corporate unit to decide the extent of capitalisation.

(ii) In case of bonus issue, it helps the clients in preparing the Memorandum for Controller of Capital Issue (CCI) and in obtaining his consent.

(iii) For companies governed by Foreign Exchange Regulation Act (FERA), merchant bankers suggest an alternative capital structure which is in conformity with the legal requirements. It also advises companies on disinvestment issues to their maximum advantage.

(iv) For sick units, it suggests appropriate capital structure which will help the unit in revival. It also advises as to the extent and means of bringing fresh capital into business.

4. Portfolio Management:

Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions as to the quantum of security and the type of security in which to invest.

Merchant bankers even undertake the function of purchase and sale of securities for their clients so as to provide them portfolio management services. Some merchant bankers are managing mutual funds and off share funds also. Merchant banks provide portfolio management services to the Indian nationals in the form of:

(a) The sale and purchase of securities;

(b) Investing and purchase of securities;

(c) Investing and managing fixed deposits;

5. Issue Management:

In the past, the functions of a merchant banker had been mainly confined to the management of new public issues of corporate securities by the newly formed companies, existing companies (further issues) and foreign companies in dilution of equity as required under FERA. The services provided by them include:

(i) Preparation of the prospectus.

(ii) Preparation of a plan and budget to estimate total expenditure of the issue.

(iii) Selection of institutional and broker underwriters and underwriting agreements.

Thus, merchant bankers not only act as experts of the type, timing and terms of issues of corporate securities and make them acceptable for the investors on the one hand and also provide flexibility and freedom to the issuing companies.

Or

What is the secondary market? Distinguish between primary market and secondary market.                          5+9=14

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:-

BASIS FOR COMPARISON

PRIMARY MARKET

SECONDARY MARKET

Meaning

The marketplace for new shares is called the primary market.

The place where formerly issued securities are traded is known as the Secondary Market.

Another name

New Issue Market (NIM)

After Market

Type of Purchasing

Direct

Indirect

Financing

It supplies funds to budding enterprises and also to existing companies for expansion and diversification.

It does not provide funding to companies.

How many times can a security be sold?

Only once

Multiple times

Buying and Selling between

Company and Investors

Investors

Who will gain the amount on the sale of shares?

Company

Investors

Intermediary

Underwriters

Brokers

Price

Fixed price

Fluctuates, depends on the demand and supply force

Organizational difference

Not rooted to any specific spot or geographical location.

It has physical existence.

7. Explain how SEBI protects the interest of investors.                    14

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 watchdog 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 set up with the main purpose of keeping a check on malpractices and protesting 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 rights of investors and ensure 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 checks 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 the securities market by taking the 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.

Or

Analyze the role of mutual funds in Indian financial system.     14

Ans: Role of mutual funds in financial market of India

When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms.

Conversely, when they invest in equity securities already held by investors, they are transferring ownership of the securities among investors.

By pooling individual investors’ small investments, mutual funds enable them to hold diversified portfolios(combinations) of debt securities.

They are also beneficial to individuals who prefer to let mutual funds make their investment decision for them. The returns of investors who invest in mutual funds are tied to the return earned by the mutual funds on their investments.

Money market mutual funds and bond mutual funds determine which debt securities to purchase after conducting a credit analysis of the firms that have issued or will be issuing debt securities.

Stocks that satisfy their specific investment objective (such as growth in value or high dividend income) and have potential for a high return, given the stock’s level of risk.

Because mutual funds typically have billions of dollars to invest in securities, they use substantial resources to make their investment decisions.

In particular, each mutual fund is managed by one or more portfolio managers, who purchase and sold securities in the fund’s portfolio. These managers are armed with information about the firms that issue the securities in which they can invest.

Problems of mutual funds in a country

Cost to manage the mutual fund:

The salary of the market analysts and fund manager basically comes from the investors. Total fund management is one of the main parameters to consider when choosing a mutual fund. Greater management fees do not guarantee better funds performance.

Lock-in periods:

Many mutual funds have long-term periods, ranging from 5 to 8 years. Existing such funds before maturity can be an expensive affair. A certain portion of the fund is always kept in cash to pay out an investor who wants to exit the fund. This portion in cash cannot earn interest for investors.

Dilution:

While diversification averages your risks of loss, it can also dilute your profits. Hence, you should not invest in more than 7-9 mutual funds at a time.

No control over cost:

The AMC who manages the operational aspect of the mutual funds and the costs are incurred by them. The investors do not control the costs in spite of the fact that they are the one who bear such costs, including the distribution costs of the mutual funds scheme.

No Tailor-Made Portfolios:

In a mutual funds scheme, an investor’s money is invested by AMC. The AMC decides the products and securities in which the investor’s money will be invested. AMC will build the portfolio, which will be common for the investors of a scheme. The investor can build a portfolio of his choice in direct investing which is not possible in a mutual fund.

Choice overloaded:

Over 800 mutual funds schemes offered by 38 mutual funds and multiple options within those schemes make it difficult for investors to choose from them . greater dissemination of industry information through various media and availability of professional advisors in the market should help investors to handle this overload.

Inefficiency in mutual fund management:

Sponsorship of mutual funds has a bearing on the integrity and efficiency of fund management which are the key to establishing investor’s confidence.

So far, only public sector sponsorship or ownership of mutual funds organizations had taken care of this need.

Sometimes sponsors of the AMC forget the scheme objectives for their profits that the investors got losses. So investors do not believe in mutual funds companies and avoid investing in mutual funds.

 

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