Financial Market and Commercial Banking

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UNIT I
1. Describe in brief about the structure of the Indian Financial System.
Answer:
Financial System is:
• An institutional framework existing in a country to enable financial transactions
• Three main parts
– Financial assets (loans, deposits, bonds, equities, etc.)
– Financial institutions (banks, mutual funds, insurance companies, etc.)
– Financial markets (money market, capital market, forex market, etc.)
• Regulation is another aspect of the financial system (RBI, SEBI, IRDA)

2. Discuss in detail the 'Financial liberalization Theory' of saving and investment.

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Answer:

The term saving refers to the activity by which claims to resources, which might be put to current
consumption, are set aside and so become available for other purposes. It represents the excess of
income over current consumption. The total volume of savings in an economy, therefore, depends
mainly upon the size of its material income and its average propensity to consume, which, in its
turn, is determined by the level and distribution of the incomes, tastes and habits of the people,
their expectations about the future, etc.

According to this theory in developing countries financial repression leads to lower levels of
savings and investments. Financial repression cab be removed by liberalization. Hence
liberalization would result in
 Increase in interest rates on financial assets due to market forces.
 Increase in savings
 Expansion in supply of credit
 Increase in investment
 Increase in productivity of investment

This will lead to financial and economic development.

3. Discuss in detail the 'Prior saving Theory' of saving and investment.

Answer:
'Prior saving Theory' (Characteristics)

 Saving as a Prerequisite for Investment

 Appropriate monetary and fiscal policy
 Generate high rate of inflation
 Controlled by interest rate
 Role of financial system – to promote financial development-transformation like
 Liability- Asset transformation
 Size- transformation
 Risk- transformation
 Maturity- transformation
There should be an appropriate policy for mobilizing and encouraging savings, since savings can
be channelized into investments. Since investment is an alternative to consumption, any
investment which is not financed by prior savings will lead to inflation and not true economic
growth.

4. Why there was a need of financial reforms in India?

Answer:
A radical restructuring of the economic system consisting of industrial deregulation, liberalisation of
policies relating to foreign direct investment, public enterprise reforms, reforms of taxation system,
trade liberalisation and financial sector reforms were initiated in 1992-93. Financial sector reforms in
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the area of commercial banking, capital markets and non-banking finance companies have also been
undertaken.
The focus of reforms in the financial markets has been on removing the structural weaknesses and
developing the markets on sound lines. The money and foreign exchange market reforms have
attempted to broaden and deepen them. Reforms in the government securities market sought to
smoothen the maturity structure of debt, raising of debt at close-to-market rates and improving the
liquidity of government securities by developing an active secondary market.
In the capital market the focus of reforms has been on strengthening the disclosure standards,
developing the market infrastructure and strengthening the risk management systems at stock
exchanges to protect the integrity and safety of the market.
Improving financial soundness and credibility of banks is a part of banking reforms under. Taken by
the RBI, a regulatory and supervisory agency over commercial banks under the Banking Companies
Regulation Act 1949. The improvement of financial health of banks is sought to be achieved by capital
adequacy norms in relation to the risks to which banks are exposed.

In regard to Non-Bank Finance Companies (NBFCs), the Reserve Bank of India has issued several
measures aimed at encouraging disciplined NBFCs which run on sound business principles. The
measures seek to protect the interests of depositors and provide more

5. " Classify the various financial intermediaries functioning in the India financial system and
bring out their features.
Answer:
The financial system is possibly the most important institutional and functional vehicle for economic
transformation. Finance is a bridge between the present and the future and whether it be the
mobilisation of savings or their efficient, effective and equitable allocation for investment, it is the
success with which the financial system performs its functions that sets the pace for the achievement
of broader national objectives.

The term financial system is a set of inter-related activities/services working together to achieve some
predetermined purpose or goal. It includes different markets, the institutions, instruments, services and
mechanisms which influence the generation of savings, investment capital formation and growth.
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"The financial system is also divided into users of financial services and providers.
Financial institutions sell their services to households, businesses and government. They are the users
of the financial services. The boundaries between these sectors are not always clear cut.
In the case of providers of financial services, although financial systems differ from country to country,
there are many similarities.
(i) Central bank
(ii) Banks
(iii) Financial institutions
(iv) Money and capital markets and
(v) Informal financial enterprises.

The organised financial system comprises the following sub-systems:

1. Banking system
2. Cooperative system
3. Development Banking system

(i) Public sector

(ii) Private sector

4.Money markets and

5. Financial companies/institutions.
UNIT II
1. List the important functions of Reserve Bank of India.

Answer:
The Reserve Bank of India (RBI) is the apex financial institution of the country's financial system
entrusted with the task of control, supervision, promotion, development and planning.
The RBI influences the management of commercial banks through its various policies, directions and
regulations. Its role in bank management is quite unique. In fact, the RBI performs the four basic
functions of management, viz., planning, organising, directing and controlling in laying a strong
foundation for the functioning of commercial bank.

The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as:
"to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage."

Functions
The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition, it
carries out a variety of developmental and promotional functions attuned to the course of economic
planning in the country:
(1) Issuing currency notes, i.e., to act as a currency authority.
(2) Serving as banker to the Government.
(3) Acting as bankers' bank and supervisor.
(4) Monetary regulation and management
(5) Exchange management and control.
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(6) Collection of data and their publication.

(7) Miscellaneous developmental and promotional functions and activities.
(8) Agricultural Finance.
(9) Industrial Finance
(10) Export Finance.
(11) Institutional promotion

2. “Profitability of Commercial Banks is compromised due to Priority Sector lending

regulation”. Comment.

Answer:

Social control over banks initiated in 1969 introduced reforms to correct the functioning of the banking
system and to promote purposeful distribution of bank credit. It was found that for various historical
reasons, the bulk of bank advances was directed to the large and medium scale industries and beg and
established houses while agriculture, small scale industries and exports which were emerging priority
sectors did not receive adequate attention. The nationalization of 14 major commercial banks in july
1969, led to considerable reorientation of bank lending towards the priority sectors. Priority sector
lending was stipulated at one-third of the outstanding credit by March 1979, and 40 per cent by 1985.
Since 1977-78, export credit has been excluded from computation of total priority sector advances, but
refinance was provided.

Forty per cent of the priority sector advances were earmarked in 1985 for agriculture and allied
activities; advances to weaker sections in agriculture and allied activities should be 50 percent of
lending for agriculture; and advances to rural artisans, craftsmen and cottage industries should be 12.5
per cent of the total advances to small scale industries. Effective from April 1993, foreign banks were
advised to bring their priority sector advances from 15 per cent hitherto fixed to 32 per cent by March
1994.

Most of the loans given to the priority sector like agriculture and allied sectors may turn into NPAs or
the loans may be waived off by state and central banks , resulting in losses to banks , rising NPAs and
difficulty in maintaining capital adequacy norms , in addition to decline in profits or losses.

3. Describe in brief the various instruments of monetary policy.

Answer:
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The central bank relies on two types of instruments. the direct and the indirect. The direct instruments
of monetary control are reserve requirements, administered interest rates and credit controls; and the
indirect instrument of control is open market operation.

Bank rate policy

Bank rate is the rate charged by the central bank for rediscounting first class bills of exchange and
government securities held by Commercial Banks.

Open Market Operations

Open market operation is mainly related to the sale of government securities and during the busy
s4eason, they sell the securities. When commercial banks sell the securities and when RBI purchases
them. The reserve position of the banks is improved and they can expand their credit to meet growing
demands.

The commercial banks have to keep with the central bank a certain percentage of their deposits in the
form of cash reserves. Increasing the CRR leads to credit contraction and reducing it will lead to
credit expansion.

Statutory Liquidity Ratio

Under the Banking Regulation Act , banks have to maintain a minimum liquid assets of 25 per cent
of their demand and time liabilities in India.

Selective Credit Controls

Selective credit controls have been used by the bank mainly with a view to restraining excessive
speculative stock-building of commodities in short supply either as a result of a crop shortage or as a
result of a fall in the production of manufactured articles following raw materials shortages, etc
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4. Give a comparative study of Public Sector Banks’ & New-Age Private Sector Banks’

Answer:

Public Sector Banks

i) State Bank of India State Bank Group
ii) Associate Bank
iii) 14 Nationalized Banks (1969) Nationalized Banks
iv) 6 Nationalized Banks (1980)
v) Regional Rural Banks Mainly sponsored by Public

B. Private Sector Banks

i) Other Private Banks;
ii) New sophisticated Private Banks;
iii) Cooperative Banks included in the second schedule;
iv) Foreign banks in India, representative offices, and
v) One non-scheduled banks

Public Sector Banks

• Public sector banks are banks in which the government has a major holding.
• At least 51% ownership is vested with the government.
• The shares of these banks are listed on stock exchanges.
• In 1969, 14 banks with deposit base of Rs. 50 Crores or more were nationalized. In 1980,, 6
more banks were nationalized.
• This step brought more than 90% of commercial banking in the public sector.
• The main function of public sector banks is provide finance for the housing projects, health
facilities and increase the chance to providing the products and services to the people of rural
areas.

Private Sector Banks

• All those banks in which majority of stake are held by private individuals
• The banks, which came in operation after 1991, with the introduction of economic reforms
and financial sector reforms are called "new private-sector banks“
• New banks are strategic in their thinking and operations.

5. Describe in detail about NABARD.

Answer:
NABARD was established as a development Bank, in terms of the Preamble of the Act, "for
providing and regulating Credit and other facilities for the promotion and development of
agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts
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and other allied economic activities in rural areas with a view to promoting integrated rural
development and securing prosperity of rural areas and for matters connected therewith or
incidental thereto."

NABARD:
(i) Serves as an apex financing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas.
(ii) Takes measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, training of personnel, etc.

(iii) co-ordinates the rural financing activities of all institutions engaged in developmental work
at the field level and maintains liaison with Government of India, State Governments,
Reserve Bank of India (RBI) and other national level institutions concerned with policy
formulation; and

(iv) Undertakes monitoring and evaluation of projects refinanced by it.

Functions of NABARD
The full form of NABARD is National Bank for Agriculture and Rural Development. The major
functions of NABARD are as follows:
• It acts as an apex body for meeting the credit needs of all types of agricultural and rural
development.
• It provides refinancing facilities to State Co-operative Banks (SCBs), Land Development
Bank (LDBs), Regional Rural Banks (RRBs) and other approved financial institutions for
financing rural economic activities.
• It co-ordinates all agricultural and rural development activities with the objective of tying
them up with planned development activities in the rural sector.
• It provides short-term, medium-term and long-term credit to SCBs, LDBs, RRBs and
approved financial institutions.
• It provides long-term assistance (not exceeding 20 years) to State Governments.
• It has the responsibility of inspecting co-operative banks and RRBs.
• It maintains a research and development fund to promote research in agriculture and rural
development.

NABARD operates throughout the country through its 28 Regional Offices and one Sub-office,
located in the capitals of all the states/union territories. It has 336 District Offices across the
country, one Sub-office at Port Blair and one special Cell at Srinagar. It also has 6 training
establishments.

6. Discuss Repo & Reverse Repo Rate

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Answer:

REPO and reverse REPO operated by RBI in dated government securities and Treasury 'bills
'(except 14 days) help banks to manage their liquidity as well as undertake switch to maximize the
return. REPOs are also used to signal changes in interest rates.

Repo Rate:
 Whenever the banks have any shortage of funds they can borrow it from RBI.
 Repo rate is the rate at which our banks borrow money from RBI.
 A reduction in the repo rate will help banks to borrow money at a lower rate.
 When the repo rate increases borrowing from RBI becomes more expensive.
 The repo rate transactions are for very short duration
 It denotes injection of liquidity.

Reverse Repo rate

• A reverse repo rate is the interest rate earned by a bank for lending money to the RBI in
exchange for Government securities.
• Reverse repo is an arrangement where RBI sells the securities to the bank for a short term on
a specified date.
• RBI us his tool when there is too much liquidity in the banking system.
• Reverse repo rate means absorption of liquidity.

7. Discuss in detail the growing importance of Internet banking in India

Answer:
Internet banking refers to the use of Internet as a remote delivery channel for the banking
services, including traditional services, such as opening an account or transferring funds
among different accounts, as well as new banking services, such as electronic bill
presentment and payment, which allow the customers to pay and receive the bills on a
bank’s web site

• It falls into four main categories Level 1 - minimum functionality sites that offer only
access to deposit account data - to Level 4 sites - highly sophisticated offerings enabling
integrated sales of additional products and access to other financial services- such as
investment and insurance.

Functions of Internet Banking

• Balance Enquiry and Statement

• Transaction History
• Transfer Funds online
• Card-2-Card Fund Transfer
• Use of debit card for online payments
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• Mobile Recharge
• Payment of utility bills
• Sending money orders
• Open FDs and RDs
• Order a Demand Draft / Pay Order

• Subscribe to mobile banking

• Request a Cheque Book
• Stop Payment Request
• Request a Debit Card /Credit Card
• Monthly Bank A/C Statement by email
• Re-issue/Upgrade of ATM/Debit Card
• Link Bank Accounts to ATM/Debit Card
• Renewal / Premature Closure of FD/RD
• De-block/Activate ATM/Debit Card
• Request a Duplicate Physical Bank Statement
• Secure Mailbox

Benefits of Internet Banking in India

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Customer Benefits Bank Benefits

Improved customer Profitable growth

service

Convenience Lower cost per transaction

Tailored products and Increased customer

services knowledge

Confirmation- Retain customers and attract

Transactions are new customers
executed and
confirmed almost
immediately

Increased comfort and Improved market image –

time saving perceived as leaders in new
technologies implementation UNIT III

Speed of transaction Better and quicker response 1. Discuss the

to the market evolution objectives, scope and
functions of SEBI.

Answer:

SEBI formed with all functional autonomy under the SEBI Act, 1992
The central Govt. is empowered to supersede the SEBI in public interest or if on account of
grave emergency
The SEBI is a body of six members comprising
 the chairman
 two members from amongst the officials of the ministries of the central government dealing
with law and finance
 two professional members having knowledge of and expertise in securities market and
 one from RBI

Objectives of SEBI

 With the prime objective of (SEBI Act , 1992)

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 Protecting the interests of investors in securities,

 Promoting the development of, and
 Regulating, the securities market and for matters connected therewith or incidental
thereto
 Self Regulation & regulation by exception

Functions of SEBI

 Protect the interests of investors in securities

 Promote development and regulation of the securities market.
 Issue guidelines for primary markets, stipulating access to capital market to improve the quality
of public issues, allotment of shares, private placement, book building, takeover of companies
and venture capital.
 In the area of secondary markets, measures to control volatility and transparency in dealings
by modifying the badla system, laying down insider regulations to protect integrity of markets,
uniform settlement, introduction of screen-based online trading, dematerialising shares by
setting up depositories and trading in derivative securities (stock index futures).

2. Write a brief note on discounting services and its importance in money market

Answer:

Money Market consists of a number of sub-markets which collectively constitute the money
market. They are,
 Call Money Market
 Commercial bills market or discount market
 Acceptance market
 Treasury bill market

BILL OF EXCHANGE :The financial instrument which is traded in the bill market of exchange.
It is used for financing a transaction in goods that takes some time to complete.

Commercial bills may be used for financing the movement and storage of goods between countries,
before export (pre-export credit), and also within the country.

In India the use of bill of exchange appears to be in vogue for financing agricultural operations,
cottage and small scale industries, and other commercial and trade transactions.

DISCOUNTING SERVICE
The central banks help banks in their liquidity management by providing them discounting and
refinancing facilities.
The RBI are in abundance liquidity (funds) to banks on occasions when liquidity shortages threaten
economic stability.
The central bank performs his function through its discount window or discounting mechanism.
Bank borrow funds temporarily at the discount window of the central bank.
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They are permitted to borrow or are given the privilege of doing so from the central bank against
certain types of eligible paper, such as the commercial bill or treasury bill, which the central bank
stands ready to discount for the purpose of financial accommodation to banks.

3. What is commercial paper? How has the growth of commercial paper market taken
place in India?
Answer:
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note.
CPs as a source of short-term debt regarded as highly safe, simple, flexible, and quality liquid
instrument .

CPs in India
It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to
diversify their sources of short-term borrowings and to provide an additional instrument to
investors.

Initially only companies with high credit rating could issues CP’s .Subsequently, primary dealers
and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding
requirements for their operations.

Introduction of CPs in India : recommendation of RBI working group on money market (1987)
Any private or public sector company can issue CPs. The transaction costs of CPs includes stamp
duty, the dealer’s fees, rating agency fees, stand by facility charges of bank.
A corporate after issuing CPs will lose a portion equal to the amount of CPs as the working capital
limits with banks

4. Define Primary and secondary markets and discuss their characteristics

Answer:
Primary Market
 It is a market in which the new securities or stocks are issued.
 The securities may be issued by a new or an existing company.
 It is used by the companies to acquire capital for the purpose of setting up a new company
for expanding an existing company.
 Investment bankers and brokers act as intermediaries for selling the stocks to the public.

The three main functions of new issue market are:

 Origination: Deals with the origin of new securities to be traded in the market.

 Underwriting: Removes the element of uncertainty in the subscription of shares.

 Distribution: Facilitates sale of securities to the investors.

Secondary Market
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 Outstanding securities are traded in the secondary market.

 It is commonly known as stock market or stock exchange.
 Equity shares, bonds, debentures and derivative products are traded on the stock exchanges.
 Well regulated and active stock market promotes capital formation.
 Growth of the primary market depends on the secondary market.

5. What are T-Bills? Discuss the role of government securities in financial markets.

Answer:

Risk-free or gilt-edged instruments G-Sec are:

 Short term (treasury bills)
 Long term (Government bonds or dated securities)

 Treasury bills (TBs), offer short-term investment opportunities, generally up to one year.
 They are thus useful in managing short-term liquidity.
 Types of treasury bills through auctions
 91- Day, 182- day, 364- day, and 14- day TBs

Important qualities of treasury bills

 The high liquidity

 Absence of risk of default
 Ready availability
 Assured yield
 Low transaction cost
 Eligibility for inclusion in statutory liquidity ratio (SLR)
 Negligible capital depreciation

The Central Bank has a special interest in developing the government securities market given its
criticality in acting as the transmission channel of monetary policy.

Role and importance of government securities in financial markets:

 Deep and Liquid GSM facilitates public borrowing at reasonable cost
 Pricing of various debt instruments
 Benchmark for proper evaluation of Risk
 Indirect Instrument for monetary policy
 Serves as a public good in financial Market
 Zero default Risk
 Channel of integration of various segments of the financial market
 Greater ability for Govt. to raise money at market rate
 Monetary policy transmission mechanism
 Develop a yield curve across maturities
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UNIT IV
1. What do you understand by a Put option?

Answer: An option is the right, but not the obligation to buy or sell something on a specified
date at a specified price.
In the securities market, an option is a contract between two parties to buy or sell specified
number of shares at a later date for an agreed price.
Three parties are involved in the option trading, the option seller, buyer and the broker.

Put option gives its owner the right to sell (or put) an asset or security to someone else.
Like the call option the contract contains:
 The name of the company whose shares are to be sold.
 The number of shares to be sold.
 The selling price or the striking price.
 The expiration date of the option.
 Put buyer gains in the bearish market when the price falls.
 When the price increases, the put buyer has to pay the premium alone and his liability is
limited to the premium amount he has paid.

2. What is zero- coupon bond

Answer:
Bond:
 It is a contract between a borrower and a lender in which the borrower is required to pay a
certain amount of interest income to the lender.
 In general, bonds carry a fixed payment of interest till the maturity date.
 The rate of interest is also known as coupon rate.

A zero-coupon bond is a debt security that doesn't pay interest (a coupon) but is traded at a deep
discount, rendering profit at maturity when the bond is redeemed for its full face value.

Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of
their coupons by a financial institution and then repackaged as zero-coupon bonds. Because they
offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more
than coupon bonds.

These bonds are issued at a deep discount and repaid the par value at maturity. The difference
between the purchase price and the par value represents the investor's return. The payment
received by the investor is equal to the principal invested plus the interest earned, compounded
semiannually, at a stated yield. The interest earned on a zero-coupon bond is an imputed interest,
meaning that it is an estimated interest rate for the bond, not an established interest rate.

3. Define derivatives. Discuss various services provided by derivatives?

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Answer:

Derivatives are financial contracts which derive their values from the underlying assets or
securities.
Some examples are:
 Options
 Futures
 Swaps

Options

 An option is the right, but not the obligation to buy or sell something on a specified date at
a specified price.
 In the securities market, an option is a contract between two parties to buy or sell specified
number of shares at a later date for an agreed price.
 Three parties are involved in the option trading, the option seller, buyer and the broker.

Futures
 Futures is a financial contract which derives its value from the underlying asset.
 There are commodity futures and financial futures.
 In the financial futures, there are foreign currencies, interest rate, stock futures and market
index futures.
 Market index futures are directly related with the stock market.

Swaps:
 Agreement between two parties to exchange assets or sets of financial obligations or a
series of cash flows for a specified period of time at predetermined intervals.
 Greater refinement in risk management techniques

Role of derivatives:

 Efficient price discovery

 Facilitates offsetting the transactions without impacting on physical goods until the expiry
of a contract.
 Enhance the utility of commodity exchanges in efficient price discovery
 Minimize price shocks triggered by unanticipated supply demand mismatches
 Economic functions
• Risk transfer
• Price discovery
• Market completion
• Lower volatility
• Higher liquidity
• Lower transaction costs
 Empirical evidence
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 Derivatives .. shift .. supply curve of investment capital down and to the

right …
 Derivative markets .. true ‘child’ of the financial & information services revol’n …
leading edge .. global integration of finance

4. Differentiate between shares and debentures. Also describe the different types of
shares.

Shares represent ownership rights of their holders. Shareholders are owners of the company.
Debentures represent liability of the firm towards outsiders. Lenders are not owners of the
company. These provide interest tax shield.

Shares can be of two types:

 Equity Shares
 Preference Shares

Equity Shares are also known as ordinary shares.

Do not have fixed rate of dividend.
There is no legal obligation to pay dividends to equity shareholders.
Preference Shares have preference for dividend payment over ordinary shareholders.
They get fixed rate of dividends.
They also have preference of repayment at the time of liquidation.

5. What are the differences between forward and future contracts?

Answer:

Forwards Futures
Traded over the counter Traded on exchange
No secondary market Secondary market exists
Terms negotiated between Standardized contract (qty,
buyer and seller date & delivery conditions)
Most contracts end with Normally no delivery
physical delivery Offsetting transaction
Credit risk assumed by Credit risk assumed by
buyer Clearing corporation and member firms
No collateral security Collateral posted -marked to the market
Participation limited to small no. Large number of participants
of large traders

6. What are ADRs and GDRs? What role do they play in Indian capital markets?

Answer:

Global Depository Receipts

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A global depositary receipt (GDR) is a bank certificate issued in multiple countries for shares in a
foreign company. The shares of a GDR trade as domestic shares. They are offered for sale globally
through various banks. A GDR a financial tool that is used by private markets to raise capital that
is denominated in either American dollars or euros. They are called European depository receipts
when private markets are trying to get euros.

GDRs are similar to American depositary receipts (ADRs). The main difference is that ADRs are
issued only by U.S. banks for foreign stocks that are traded on a U.S. exchange. The underlying
security of the ADRs is held by an American financial institution overseas rather than by a global
institution. ADRs help reduce the administration and duty costs that would otherwise be levied on
each transaction. They are a great way to buy shares in a foreign company while obtaining any
dividends and capital gains in American dollars.

American Depository Receipts

ADRs do not reduce or get rid of the currency and economic risks for the underlying shares in
another country, however. Dividend payments in euros are converted to American dollars, net of
conversion expenses and foreign taxes. This is done in accordance with the deposit agreement

In developing countries like India, the importance of capital market is self-evident. In this market, various
types of securities like ADRs and GDRs help to mobilize savings from various sectors of the population.
The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people
to invest in securities. This accelerates the capital formation in the country.

ADRs and GDRs make possible to generate foreign capital. Indian firms are able to generate capital funds
from overseas markets by way of Foreign portfolio investments and Foreign direct investments. The
government has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the
foreign capital but also foreign technology which is important for economic development of the country.

Unit V
1. Describe in detail about the various schemes of Mutual Fund Company.

Answer:

I. By Structure
 Open - Ended Schemes
 Close - Ended Schemes
II. By Nature
1. Equity fund:
 Diversified Equity Funds
 Mid-Cap Funds
 Sector Specific Funds
 Tax Savings Funds

2. Debt funds:
 Gilt Funds
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 Income Funds
 MIPs:
 Short Term Plans (STPs)
 Liquid Funds
2. Balanced funds

III. By investment objective:

 Growth Schemes
 Income Schemes
 Balanced Schemes
 Money Market Schemes
 Sector Specific Schemes
 Other schemes
 Tax Saving Schemes
 Index Schemes

3. What is open-ended mutual fund? Also define lock-in-Period?

Answer:

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous
basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at
Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.
Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV, which is
based on the value of the fund’s underlying securities and is generally calculated at the close of every
trading day. Investors buy shares directly from a fund.

It does not have restrictions on the amount of shares the fund can issue. The majority of mutual funds are
open-end, providing investors with a useful and convenient investing vehicle. When a fund's investment
manager(s) determine that a fund's total assets have become too large to effectively execute its stated
objective, the fund will be closed to new investors, and in extreme cases, will be closed to new investment
by existing fund investors.

Open-end funds must maintain cash reserves to meet redemptions. Since closed-end funds do not have
that requirement, they may invest in illiquid stocks, securities or markets such as real estate. Closed-end
funds may impose additional costs through wide bid-ask spreads for illiquid funds, and volatile
premium/discount to NAV. Open-end funds typically provide more security, whereas closed-end funds
often provide a bigger return.

Lock in period refers to the time, within which the share or mutual fund owner cannot sell the securities.
It generally happens in case of tax saving mutual funds, which may have a lock in period of 3-5 years.

4. What are the major advantages of investment through mutual funds?

Answer:

Advantages of Investing Mutual Funds

1. Professional Management
 Financial Market and Commercial Banking
Code: RMB FM 03
Workbook

2. Diversification
3. Economies of Scale
4. Spread of Risk
5. Liquidity & Flexibility
6. Simplicity
7. Low transaction Costs
8. Taxes Benefit
9. Wide Choice of Schemes

5. Define NAV. How is it computed?

Answer:

 Net Asset Value (NAV) & Expected Rate of Return (RRU)

 NAV =
Total Market Value of the Asset of the Fund – Liabilities
Number of Fund’s Outstanding Units
 RRU =
(NAV t – NAV t-1 ) + Dividends + Capital Gain
NAV t-1
Where, t = Current Year t-1 = Previous Year

6. Discuss the advantages of credit card to its members.

7. 'Insurance is the process in which uncertainties are made certain.' Discuss the statement
and explain the importance of the insurance.

Answer:
 Life insurance policy is a claim to a future payment of either a lump sum or a stream of
Income
 Insurance companies invest their funds judiciously to achieve the objective of Safety
,Liquidity and rate of return
 In a flexible interest rate structure the risk involved is more high in case of assured sum
returns