Easy2Siksha.com
GNDU Question Paper-2022
Bachelor of Business Administration
BBA 3
rd
Semester
INDIAN FINANCIAL SYSTEM
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss various provisions of Securities Contract (Regulation) Rules.
2. Briefly discuss:
(a) Constitution of SEBI.
(b) Functions of SEBI.
SECTION-B
3. Name the regulatory body of the banking system in India. Also, discuss its role and
importance with respect to the working of the banking system.
4. What types of instruments are traded in the money market? Also, explain the role of
the money market in India.
SECTION-C
5. Write a detailed note on the working and performance of mutual funds.
Easy2Siksha.com
6. Explain the duties, powers and functions of IRDA.
SECTION-D
7. Give an overview of capital market instruments. Explain by citing examples.
8. "FII's and FDI's play a significant role in the development of economy." Justify.
Easy2Siksha.com
GNDU Answer Paper-2022
Bachelor of Business Administration
BBA 3
rd
Semester
INDIAN FINANCIAL SYSTEM
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss various provisions of Securities Contract (Regulation) Rules.
Ans: 🏛 A Walk Through the “Market of Trust”
Imagine you are standing in front of a giant, glittering marketplace — not the kind selling
fruits or clothes, but one dealing in shares, bonds, derivatives — the beating heart of the
securities market. This is where companies come to raise money, and investors come to put
their savings to work.
Now, here’s the twist: without rules, this market would quickly descend into chaos. Imagine
traders shouting random numbers, fake companies selling non-existent shares, or deals
happening in dark corners without records. Investors would lose faith, companies wouldn’t
get funds, and the entire economy would wobble.
That’s exactly why the Securities Contracts (Regulation) Act, 1956 (SCRA) exists, and under
it, the Securities Contracts (Regulation) Rules, 1957 (SCRR) were framed — to keep this
market orderly, transparent, and trustworthy.
Let’s turn these rules into a story you can walk through like a guided tour.
Birth of the Rules
When India’s securities market was young, it was like a bustling street fair — lively but
prone to scams, manipulations, and unfair practices. In 1957, the government said, “We
need a rulebook.” These rules were created under the SCRA to:
• Define what counts as a security
Easy2Siksha.com
• Set guidelines for recognising stock exchanges
• Lay down principles for fair trading
• Protect investors
🏷 Key Provisions — Explained Like Real-Life Scenarios
We’ll go section by section, but through the lens of situations you might actually imagine.
1. Recognition of Stock Exchanges
Think of this like giving a mall an official licence to operate.
• Rule 3: A stock exchange must apply to the Central Government for recognition.
• Rule 4: Application must be complete with rules, bye-laws, and trading procedures.
• Rule 5: Recognition is given only if the exchange meets certain standards — fair
rules, no monopoly control, adequate infrastructure.
Why? So only genuine and well-structured marketplaces handle securities, keeping fraud
at bay.
2. Conditions for Recognition
Imagine running a theme park — you can’t just get the licence once and ignore safety. You
have to maintain it.
• The exchange must ensure fair access to members.
• It must prevent fraud, insider trading, and manipulation.
• Maintain proper records of all transactions.
This means the “market gates” remain guarded against malpractice.
3. Qualifications for Membership of a Stock Exchange
Picture this as a filter for who’s allowed to own a shop in our “securities mall.”
• Members must be of good moral standing, financially sound, and meet criteria like
age and experience.
• No one declared insolvent or convicted of fraud can be admitted.
This protects investors from shady “shopkeepers” in the stock market.
4. Listing of Securities
When a company wants its shares traded publicly, it’s like applying for a “stall” in this big
mall.
• Rule 19: Sets conditions for a company to list securities, such as minimum public
shareholding, paid-up capital, and adherence to disclosure norms.
Easy2Siksha.com
• The idea is that only companies meeting certain credibility standards get a place to
trade.
5. Minimum Public Shareholding (MPS)
Here’s a big one: a listed company must keep a certain percentage of its shares with the
public (currently 25% for most companies).
• Why? Imagine if only insiders held all the shares — prices could be easily
manipulated.
• Public participation keeps markets fair and liquid.
6. Clearing and Settlement
After every trade, there’s a behind-the-scenes handshake — delivering the shares and the
money.
• The rules ensure settlement happens in a set time, usually through a recognised
clearing corporation.
• This is like making sure every shopper pays and every shopkeeper delivers before
leaving the mall.
7. Powers to Call for Information
The regulators can ask stock exchanges or companies for data anytime.
• Think of this like a market inspector showing up to check books and ledgers, ensuring
no one’s cooking the numbers.
8. Bye-laws of Stock Exchanges
These are the mall’s internal rules — things like trading hours, dispute resolution,
arbitration, etc.
• They ensure smooth day-to-day functioning without confusion.
9. Government and SEBI Oversight
Even after recognition, exchanges are monitored by the Central Government and SEBI.
• They can suspend or withdraw recognition if things go wrong.
• In story terms: if the mall violates safety norms, the licence is revoked.
Why These Rules Matter in Real Life
Let’s revisit Meera, a young investor. She puts ₹10,000 into shares via an online broker.
She’s confident because:
• The broker is a registered member of a recognised exchange.
• The company she invests in meets public shareholding norms and is listed lawfully.
Easy2Siksha.com
• Trades are settled promptly, and records are transparent.
She sleeps peacefully knowing that if anything fishy happens, SEBI can step in backed by
these very rules.
In Short — The Provisions You Must Remember
Provision Area
Purpose
Recognition of stock exchanges
Ensure only credible marketplaces exist
Conditions for recognition
Maintain fairness, prevent fraud
Membership qualifications
Allow only fit and proper persons to trade
Listing of securities
Ensure companies are credible and transparent
Minimum public shareholding
Prevent price manipulation, ensure liquidity
Clearing and settlement
Guarantee timely exchange of money and securities
Powers to call for information
Enable inspections and enforce compliance
Bye-laws of exchanges
Manage daily operations
Government & SEBI oversight
Continuous monitoring and enforcement
Final Word — The Market’s Code of Honour
Think of the Securities Contracts (Regulation) Rules as the code of honour for India’s
securities market. They don’t just exist to punish wrongdoers — they set the tone for
fairness, transparency, and trust.
Just like a well-run marketplace attracts more shoppers, a regulated securities market
attracts more investors, which fuels business growth and, ultimately, economic progress.
So, next time you hear about a company “getting listed” or SEBI “tightening norms,”
remember — it’s all part of this carefully woven safety net, ensuring that the marketplace of
money remains a place where trust is the real currency.
2. Briefly discuss:
(a) Constitution of SEBI.
(b) Functions of SEBI.
Ans: The Tale of the Watchtower of Dalal Street
Picture the bustling heart of Mumbai — Dalal Street — home to the Bombay Stock
Exchange. Traders shout orders, big screens flash numbers, and millions of rupees change
hands every minute.
Easy2Siksha.com
Now imagine there’s a tall watchtower right in the middle, where vigilant guardians observe
every move — spotting mischief-makers, ensuring fairness, and protecting ordinary people’s
hard-earned money invested in shares, mutual funds, and bonds.
That “watchtower” is none other than SEBI — the Securities and Exchange Board of India.
Why SEBI Came into Existence
Before SEBI was born in 1988 (as a non-statutory body, later given statutory powers in
1992), India’s securities market was something like a busy festival without enough
organisers — colourful, but prone to chaos. Insider trading, price manipulation, delayed
settlements — all of these weakened investor trust.
The government knew that if savings were to flow into companies through the stock market,
investors needed protection and markets needed discipline. And so, SEBI was created — the
guardian of securities trading in India.
(a) Constitution of SEBI — The Guardians’ Council
Think of SEBI’s constitution as describing who sits in that watchtower and how it works.
SEBI was established under the SEBI Act, 1992 as a statutory body, meaning it has legal
authority given by Parliament. Its constitution defines:
1. Headquarters and Offices
• Head Office: Mumbai (Dalal Street’s perfect neighbour).
• Regional Offices: Spread across New Delhi, Kolkata, Chennai, and other major cities
to keep an eye nationwide.
2. Composition — Who’s in the Watchtower?
As per the SEBI Act:
1. Chairman – Appointed by the Central Government.
2. Two members – From among officials of the Union Finance Ministry.
3. One member – From the Reserve Bank of India.
4. Five other members – Appointed by the Central Government, of which at least three
must be whole-time members (meaning SEBI is their only job).
Why this mix? It brings together:
• Policy expertise (Finance Ministry)
• Monetary insight (RBI)
• Full-time market regulators (whole-time members)
• A strong leader (Chairman)
Easy2Siksha.com
Like a cricket team with a perfect balance of batsmen, bowlers, and fielders — SEBI’s
composition ensures no single interest dominates.
3. Powers and Authority
Being statutory means SEBI doesn’t just “suggest” — it can make regulations, pass orders,
investigate, and impose penalties to ensure smooth functioning of the securities market.
Story Moment: Think of a busy train station — SEBI’s constitution is like deciding who the
station master is, who handles signals, who runs security, and who ensures passenger
safety. Without that structure, trains (trades) would collide or get derailed.
(b) Functions of SEBI — What the Guardians Do
SEBI’s functions can be summed up in three big missions: Protect, Regulate, Develop the
securities market. Let’s break these down into real-life situations.
1. Protective Functions 🛡
These are like shields guarding investors from harm.
• Preventing insider trading: Stopping company insiders from using secret information
for unfair profits.
• Prohibiting fraudulent and unfair trade practices: No fake rumours to jack up share
prices.
• Educating investors: Through awareness programs, booklets, and campaigns so
people invest wisely.
• Ensuring fair disclosure: Companies must publish accurate, timely information so
investors can make informed decisions.
Mini Story: Ravi, a small investor, buys shares of a company because of SEBI’s mandated
public disclosures — no hidden skeletons. Later, SEBI fines a company official for insider
trading, proving the watchdog is alert.
2. Regulatory Functions ⚖
These are the laws of the marketplace — setting boundaries so everyone plays fair.
• Regulating stock exchanges: Setting rules for their functioning.
• Registering and supervising intermediaries: Brokers, merchant bankers, portfolio
managers, mutual funds — all need SEBI’s approval.
• Regulating takeover of companies: So acquisitions happen fairly and publicly.
• Conducting inquiries and audits: To catch malpractice early.
Analogy: Like a football referee — SEBI doesn’t play the game, but it ensures no one kicks
outside the rules.
Easy2Siksha.com
3. Developmental Functions
These help the market grow and modernise.
• Promoting electronic trading and settlement: Moving from paper shares to digital
demat accounts.
• Training intermediaries: Ensuring brokers and fund managers know their job well.
• Encouraging innovation: New products like derivatives, REITs, and ETFs.
• Improving investor services: Faster grievance redressal, better access to market
data.
Mini Story: Thanks to SEBI’s developmental push, Priya now invests in mutual funds online,
with instant settlement and transparent tracking — things unheard of in the 90s.
4. Quasi-Judicial, Quasi-Legislative, and Quasi-Executive Role
• Quasi-Legislative: Makes regulations.
• Quasi-Executive: Enforces them.
• Quasi-Judicial: Can hear cases and pass rulings.
In other words, SEBI can make the law (in its domain), enforce it, and even judge disputes —
all within boundaries set by Parliament.
Quick Summary Table for Exams
Function Type
Examples
Protective
Prevent insider trading, stop fraud, investor education
Regulatory
Stock exchange regulation, register intermediaries, takeover rules
Developmental
E-trading, new products, training, better services
Closing Story — Why SEBI Matters
Imagine the securities market as a vast ocean of money and opportunities. Ships
(companies) sail here to raise funds, and passengers (investors) board them hoping to reach
the island of profit. Without a lighthouse, storms of fraud and waves of manipulation could
wreck them.
SEBI is that lighthouse — guiding, warning, and ensuring safe passage. Its constitution
ensures the right people are at the helm, and its functions ensure the market runs like a
clean, efficient, and trustworthy port.
Easy2Siksha.com
SECTION-B
3. Name the regulatory body of the banking system in India. Also, discuss its role and
importance with respect to the working of the banking system.
Ans: The Regulatory Body of the Banking System in India: RBI and Its Role
Imagine you are standing in a busy railway station. Hundreds of trains are running,
passengers are moving in and out, signals are changing, and announcements are being
made. Now think—what if there were no station master, no signal system, and no proper
rules? It would be complete chaos: accidents, delays, and confusion everywhere.
The banking system in India is somewhat similar to that railway station. Banks are like
trains—each one running in its own direction, serving thousands of passengers (the
customers). But to make sure that all trains run on time, follow the signals, and avoid
accidents, we need a central authority. In the case of banks, this authority is the Reserve
Bank of India (RBI).
Yes, the RBI is the regulatory body of the Indian banking system. It was established in 1935,
and ever since then, it has been like the “station master” of our country’s financial system—
guiding, controlling, and supervising every move of the banks.
But how exactly does it do this? Why is its role so important? Let’s understand this step by
step.
A Short Story to Begin: The Farmer, the Trader, and the Bank
Long ago, in a small Indian village, there was a farmer named Raghu. After harvest season,
he wanted to sell his wheat. A trader agreed to buy it but didn’t have money ready at that
moment. So Raghu went to the village moneylender, who charged him very high interest.
Raghu suffered huge losses every year because of these unfair practices.
Later, when a government-backed bank opened in his district, Raghu could borrow money
at a fair interest rate and also save his earnings safely. But here’s the catch—if there was no
rule to guide the bank, even banks might have started charging unfair interest or working
only for profit. That’s where the RBI steps in. It ensures that banks remain fair, stable, and
trustworthy, so that ordinary people like Raghu are protected.
This story shows why regulation is necessary: without rules, even banks could misuse their
power, and the trust of people would break.
Role of RBI in the Banking System
Now let’s explore the main functions and roles of RBI, explained in the simplest manner
possible:
Easy2Siksha.com
1. Issuing Currency – The Money Maker
Have you ever noticed that every note in your wallet says, “I promise to pay the bearer the
sum of…”, signed by the RBI Governor? This is because only RBI has the authority to print
currency notes in India (except one rupee note, which is issued by the Ministry of Finance).
By controlling the supply of money, RBI ensures that too much money is not floating in the
economy (which could cause inflation), and too little money is not circulating (which could
cause slowdown).
2. Monetary Policy – The Balancing Act
Think of RBI as a doctor of the economy. Just like a doctor balances your diet, sleep, and
medicines, the RBI balances the economy using tools like:
• Repo Rate (rate at which RBI lends to banks)
• Reverse Repo Rate (rate at which RBI borrows from banks)
• CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio)
By adjusting these rates, RBI controls inflation, encourages investment, and ensures price
stability.
3. Regulating Banks – The Watchdog
RBI keeps an eye on every bank. It checks:
• Are banks keeping enough money in reserves?
• Are they lending responsibly?
• Are they protecting customer deposits?
This way, RBI ensures banks don’t become careless or collapse suddenly, which could harm
millions of depositors.
4. Controlling Inflation and Deflation – The Economy’s Thermometer
Inflation is like a fever—if prices rise too fast, RBI uses its tools to cool it down by reducing
money supply. If the economy is too cold (deflation), it increases money supply to
encourage spending and growth.
5. Foreign Exchange Control – The Currency Guardian
The RBI also manages India’s foreign exchange reserves. It controls the value of the Indian
Rupee in comparison to other currencies, making sure that imports and exports remain
balanced.
6. Promoting Financial Inclusion – Banking for All
Easy2Siksha.com
RBI makes rules so that banks reach even the remotest villages. Schemes like Jan Dhan
Yojana and encouragement for mobile banking came under RBI’s guidance. Its aim is that
even the poorest person should have access to banking.
7. Consumer Protection – The People’s Friend
Suppose your bank overcharges you or doesn’t listen to your complaint. What do you do?
You can approach the Banking Ombudsman scheme started by RBI. This ensures customers
are not harassed and their trust in banks remains intact.
Importance of RBI in the Banking System
Now that we know its roles, let’s connect them with why RBI is so important.
1. Stability and Trust – Banks are the backbone of the economy. Without RBI’s
supervision, banks could take too many risks, and if they failed, ordinary people
would lose their hard-earned savings. RBI ensures this doesn’t happen.
2. Smooth Flow of Money – Just like blood keeps our body alive, money keeps the
economy alive. RBI regulates this flow so that there is neither shortage nor overflow.
3. Protection of Depositors – People keep money in banks because they trust that it is
safe. RBI makes sure banks follow strict rules to safeguard these deposits.
4. Encouraging Growth – By reducing interest rates, RBI makes loans cheaper so that
businesses can grow, farmers can buy better seeds, and students can study with
education loans.
5. Fighting Financial Crimes – RBI also helps prevent money laundering, black money,
and fake currency circulation.
Another Small Story: The Festival Market
Imagine during Diwali, every shopkeeper suddenly increases prices of sweets, clothes, and
gifts. Customers are helpless because they need to buy for the festival. If nobody controlled
these rising prices, only rich people could afford celebrations.
But thanks to RBI’s monetary policies, inflation is controlled, and everyone—from a middle-
class family to a poor household—can celebrate festivals without being crushed by rising
prices. This story shows how RBI indirectly makes life easier for millions.
Conclusion
The Reserve Bank of India is not just a bank for banks—it is the guardian, guide, and
protector of the Indian economy. It issues money, regulates banks, controls inflation,
manages foreign exchange, protects depositors, and promotes financial inclusion.
Easy2Siksha.com
Without RBI, the banking system would be like a railway station without a station master—
confusing, unsafe, and prone to accidents. Thanks to its strict supervision and thoughtful
policies, our economy moves forward smoothly, like a well-managed train network.
4. What types of instruments are traded in the money market? Also, explain the role of
the money market in India.
Ans: Imagine for a moment that money is like water in a city. Some people have extra water
stored in tanks, while others are facing a shortage. To keep the city running smoothly, water
needs to keep flowing from those who have extra to those who need it—sometimes only for
a short while. If this flow stops, the city suffers: factories halt, homes dry up, and hospitals
face crises.
The money market works in exactly the same way. It is like the plumbing system of the
economy that makes sure money is always available where it is needed most—but only for
short durations. The money market deals in short-term funds, generally for a period of up to
one year. Banks, companies, and even the government use it to manage their short-term
financial needs.
Now, let’s break this story into two major parts:
1. The instruments (the tools through which money flows in the market).
2. The role of the money market in India (why it is so important for our country’s
economy).
Part 1: Instruments of the Money Market
Think of the instruments as the different kinds of water pipes that allow the flow of money.
Each pipe has its own design, purpose, and users. Let’s look at them one by one:
1. Treasury Bills (T-Bills)
These are like the government’s “I owe you” notes. When the government needs short-term
funds (say, for a few weeks or months), it sells T-Bills to the public, banks, or institutions.
Later, the government repays with a fixed return.
• Period: 91 days, 182 days, or 364 days.
• Users: Mostly bought by banks and financial institutions.
• Example: Imagine the Indian government wants to bridge a small gap in its budget
while waiting for tax collections. It issues T-Bills, collects money, and later repays.
2. Commercial Paper (CP)
Easy2Siksha.com
This is like a promissory note issued by big companies. When a large corporation, such as
Reliance or Tata, needs quick money for working capital, it issues CP. Investors buy it, and
the company promises to repay with interest after a few months.
• Period: 15 days to 1 year.
• Users: Large and financially strong companies.
3. Certificate of Deposit (CD)
This is a receipt issued by banks when they borrow money from big investors for a short
period. It is like an FD (Fixed Deposit) but for a shorter time and issued in a negotiable form.
• Period: 7 days to 1 year (for commercial banks).
• Users: Corporates, individuals, or institutions.
4. Call Money and Notice Money
This is money borrowed and lent for very short periods—sometimes just for a single day!
• Call Money: Overnight borrowing.
• Notice Money: Borrowed for 2–14 days.
• Example: If Bank A suddenly faces a shortage of funds to maintain its daily balance
with RBI, it can borrow call money from Bank B for just one night.
5. Commercial Bills
These are short-term instruments used in trade. For example, if a wholesaler sells goods to a
retailer on credit, the retailer may issue a bill promising to pay after 90 days. The wholesaler
can get this bill discounted at a bank and receive immediate cash.
• Period: Usually 90 days.
• Purpose: Helps traders and businesses maintain liquidity.
6. Repos (Repurchase Agreements)
Think of this as pawning. A bank sells securities to another bank with an agreement to buy
them back after a short period at a slightly higher price.
• Period: 1 day to 14 days (sometimes longer).
• Users: Banks and financial institutions.
Easy2Siksha.com
7. Money Market Mutual Funds
These are schemes where small investors can also participate indirectly in the money
market through mutual funds. They invest in safe, short-term instruments and give ordinary
people a chance to earn returns.
So, the money market is like a toolbox with different instruments—each designed to solve
short-term financial needs of different participants: government, companies, banks, traders,
and even individuals.
Part 2: Role of the Money Market in India
Now that we know the tools, let’s explore why the money market is so vital for India’s
economic health. To explain this, let me tell you a small story.
Story: The Festival Rush
Imagine a shopkeeper in Delhi named Ramesh. During normal months, he sells around 50
sarees. But during the festival of Diwali, his demand shoots up—he needs 500 sarees in
stock! He doesn’t have enough money to buy them immediately. On the other side, another
businessman has extra cash that he won’t need for 2–3 months. Through the money market
(via banks, commercial papers, or bills), Ramesh can borrow money for a short time, stock
up on sarees, and repay later after making profits.
This little story of Ramesh is actually the story of India’s economy. The money market
ensures that temporary shortages of money don’t stop growth, production, or trade.
Let’s now highlight its broader roles:
1. Maintains Liquidity in the Economy
The money market ensures that businesses and banks always have access to liquid funds.
Without it, even a temporary shortage of money could bring activities to a halt.
2. Helps Government in Managing Funds
Through treasury bills and repos, the government manages its short-term cash needs. This
avoids situations where projects or expenses stop due to lack of funds.
3. Supports Monetary Policy of RBI
Easy2Siksha.com
The Reserve Bank of India (RBI) uses the money market to control inflation and maintain
stability. By increasing or decreasing the supply of money (through repo rates, reverse repo,
etc.), RBI influences borrowing and lending rates.
4. Promotes Industrial Growth
Industries often face a “cash flow gap”—payments to suppliers are due before payments
from customers are received. Instruments like commercial papers and bills help industries
bridge this gap and continue production smoothly.
5. Encourages Savings and Investments
Money Market Mutual Funds allow even small investors to park their money safely for short
periods. This not only benefits individuals but also channels idle money into productive use.
6. Ensures Financial Stability
The money market acts as a shock absorber. Suppose banks face a sudden rush of
withdrawals, they can borrow from the money market instead of collapsing. This maintains
public confidence in the financial system.
7. Efficient Allocation of Resources
Funds flow to those who need them most urgently and can use them productively. This
ensures that money is not lying idle in one corner of the economy but circulating actively.
Conclusion
The money market may sound technical, but in reality, it is simply the “short-term heart” of
the economy. Just like the heart pumps blood to every part of the body, the money market
pumps funds to every part of the economy—sometimes for just a few days, sometimes for a
few months, but always keeping the system alive and active.
It provides different instruments like treasury bills, commercial papers, certificates of
deposit, call money, repos, and more, each catering to specific short-term needs. For India,
it plays a crucial role by maintaining liquidity, supporting government finances, aiding RBI’s
monetary policy, helping industries, encouraging investments, and ensuring financial
stability.
Easy2Siksha.com
SECTION-C
5. Write a detailed note on the working and performance of mutual funds.
Ans: The Tea-Shop Lesson on Mutual Funds
On a rainy evening, Anil, a young professional, meets his childhood friend Meera, who works
as a financial advisor. Anil is frustrated.
“I want to invest and grow my money, but I don’t have the time or expertise to track the
stock market.”
Meera smiles and stirs her chai.
“Then you need to meet my friend — not a person, but a concept — called Mutual Funds.
It’s like pooling money with many others, so a professional manager can do the heavy lifting
for you.”
And just like that, over steaming cups of tea, she breaks down the idea in a way that sticks.
What are Mutual Funds?
A mutual fund is an investment vehicle that collects money from multiple investors and
invests it in a diversified portfolio of securities like stocks, bonds, money market
instruments, or a mix of these.
It’s like a community kitchen: everyone contributes ingredients (money), and a skilled chef
(fund manager) prepares a large, varied meal (portfolio) that everyone shares in proportion
to what they put in.
⚙ How Do Mutual Funds Work?
Let’s follow the life of Anil’s ₹10,000 investment step-by-step:
1. Pooling of Funds
Anil’s money is added to the pool of funds from thousands of investors.
2. Professional Management
A fund manager, backed by a research team, decides where and when to invest this pool for
maximum returns within the scheme’s objective.
3. Diversification
Instead of investing in just one or two companies (risky), the fund spreads investments
across multiple securities, reducing the impact of a single loss.
4. Units and NAV
Easy2Siksha.com
Anil’s contribution buys him units of the mutual fund, priced at the Net Asset Value (NAV) —
which is the market value of all assets in the portfolio divided by the number of units. NAV
changes daily based on market movement.
5. Returns
If the value of the portfolio increases, so does the NAV, and Anil’s investment grows.
Returns can come as:
• Capital Gains (selling investments at higher prices)
• Dividends/Interest from the securities held.
6. Redemption
When Anil wants his money back, he redeems his units at the prevailing NAV. In open-ended
funds, this can be done any time; in close-ended funds, only at maturity.
The Structure of a Mutual Fund in India
SEBI (Securities and Exchange Board of India) regulates mutual funds to protect investors.
The basic structure includes:
1. Sponsor – Like the promoter who sets up the fund.
2. Trust – Holds investors’ money for their benefit.
3. Asset Management Company (AMC) – The fund manager and their team.
4. Custodian – Safekeeps the securities.
5. Registrar & Transfer Agents – Maintain investor records.
Types of Mutual Funds (Brief)
• Equity Funds – Invest mainly in shares.
• Debt Funds – Invest in fixed-income instruments like bonds.
• Hybrid Funds – Mix of equity and debt.
• Money Market Funds – For short-term parking of surplus funds.
• Sector/Thematic Funds – Invest in specific industries (IT, pharma, etc.).
Performance of Mutual Funds — How Do We Judge?
Meera explains to Anil that performance is more than “high returns” — it’s about
consistency, risk control, and matching goals.
1. Past Returns
We look at returns over different periods (1-year, 3-year, 5-year). But remember: past
performance is not a guarantee of future results.
Easy2Siksha.com
2. Benchmark Comparison
Each fund is compared to a benchmark index. If an equity fund benchmarked to Nifty 50
delivers 12% when Nifty gives 10%, it has outperformed.
3. Risk-Adjusted Returns
A good fund isn’t just about high returns — it’s about how much risk was taken to get there.
Measures like Sharpe Ratio capture this.
4. Consistency
Did the fund perform steadily across different market conditions, or only in bull runs?
5. Expense Ratio
This is the fee charged by the AMC for managing the fund. Lower expense ratios mean more
of your money stays invested.
Factors Influencing Mutual Fund Performance
1. Market Conditions – Bull or bear markets affect NAV.
2. Fund Manager’s Skill – Choice of securities, timing, and sector selection matter.
3. Fund Type – Equity funds are more volatile than debt funds.
4. Economic Factors – Interest rates, inflation, and government policies.
Story Break — Anil’s First-Year Report
After a year, Anil checks his account:
• He had invested ₹10,000 in a diversified equity fund.
• The NAV increased from ₹20 to ₹23.
• His investment is now worth ₹11,500.
“Not bad,” he smiles. But Meera reminds him, “The true magic of mutual funds is in long-
term compounding. Patience is your friend.”
Advantages of Mutual Funds
• Professional Management – Experts handle the nitty-gritty.
• Diversification – Reduces risk.
• Liquidity – Easy to enter or exit (open-ended funds).
• Transparency – Regular disclosures by AMC.
• Accessibility – Start with small amounts (as low as ₹500 in SIPs).
⚠ Limitations/Disadvantages
Easy2Siksha.com
• Market Risk – NAV can fall if markets drop.
• Costs – Expense ratio and exit loads can eat into returns.
• No Guaranteed Returns – Even the best fund can have a bad year.
🛠 How Investors Can Maximise Mutual Fund Benefits
1. Invest according to your goals and risk appetite.
2. Use Systematic Investment Plans (SIPs) for disciplined investing.
3. Review performance periodically.
4. Don’t panic with short-term market fluctuations.
5. Compare funds before switching.
The Big Picture — Mutual Funds in India’s Growth Story
In the past two decades, mutual funds in India have grown from being urban investment
options to reaching small towns and villages. AMFI (Association of Mutual Funds in India)
campaigns like "Mutual Funds Sahi Hai" have made them mainstream.
With increasing financial literacy and digital platforms, mutual funds are becoming the go-to
choice for investors who want both convenience and professional management.
🗝 Recap Table for Exam-Ready Revision
Aspect
Key Points
Working
Pooling money, professional management, diversification, NAV-based
returns
Structure
Sponsor, Trust, AMC, Custodian, Registrar
Performance
Criteria
Past returns, benchmark comparison, risk-adjusted returns,
consistency, expense ratio
Advantages
Professional management, diversification, liquidity, transparency,
accessibility
Limitations
Market risk, costs, no guaranteed returns
Closing Thought
Mutual funds are like shared journeys — many travellers (investors) pooling their resources,
guided by an experienced driver (fund manager), moving toward a destination (financial
goal). The road may have bumps (market volatility), but with patience, discipline, and the
right route, it can be one of the smoothest rides to wealth creation.
Easy2Siksha.com
6. Explain the duties, powers and functions of IRDA.
Ans: The Story of a Watchful Station Master and the IRDA
Imagine India’s vast insurance sector as a busy railway network. The trains are the insurance
companies, the passengers are policyholders, and the journey represents the financial
protection they seek.
Now, on any big railway station, you need a station master — someone who ensures trains
run on time, the staff do their jobs, safety rules are followed, and passengers are cared for.
In India’s insurance “station”, that role is played by the IRDA — the Insurance Regulatory
and Development Authority of India.
It’s not just a regulator, but also a protector, promoter, and guide for the entire insurance
industry. Let’s travel together through its duties, powers, and functions — not in dry bullet
points, but as a living, breathing story.
A Quick Introduction — Who is the IRDA?
The IRDA was set up under the IRDA Act, 1999 to regulate, promote, and ensure the orderly
growth of the insurance industry in India. Before IRDA existed, insurance was largely
government-controlled and lacked a strong, independent regulator. IRDA became that
independent watchdog, ensuring trust between insurers and policyholders.
🛤 Duties of IRDA — The Watchful Eyes of the Station Master
Just like a station master must make sure trains run safely and punctually, IRDA’s duties
revolve around oversight and protection.
1. Protecting Policyholders’ Interests
IRDA’s first and foremost duty is to make sure passengers (policyholders) are treated fairly.
This includes:
• Ensuring insurance companies honour claims on time.
• Making policy terms clear and understandable.
• Setting grievance redressal systems in place.
2. Regulating the Industry
No train should run without meeting safety standards, and no insurer should operate
without meeting IRDA’s requirements. Duties include:
• Issuing licenses to insurance companies, agents, brokers.
• Monitoring solvency margins to ensure insurers can pay claims.
• Approving products before they are launched.
3. Promoting the Growth of Insurance
Easy2Siksha.com
IRDA also has to make sure the railway lines reach more towns — meaning, insurance
should reach rural areas and underserved markets.
• Encouraging innovation in insurance products.
• Promoting financial literacy about insurance.
• Expanding insurance penetration across India.
4. Ensuring Financial Stability
The insurance sector must remain financially sound. This involves:
• Overseeing investments made by insurers.
• Making sure risks are diversified.
• Preventing fraud and malpractice.
⚖ Powers of IRDA — The Authority’s Whistle and Red Flag
The station master’s whistle has power — it can stop a train, fine a staff member, or allow a
special service to pass. IRDA’s powers are the legal tools it can use to ensure smooth
functioning.
1. Licensing and Registration Powers
IRDA can grant, renew, modify, suspend, or cancel the license of an insurer, agent, broker,
or surveyor.
2. Power to Set Regulations
It can issue regulations covering:
• Commission limits for agents.
• Investment guidelines.
• Code of conduct for intermediaries.
3. Investigative Powers
Just like a station master can inspect tracks after a derailment, IRDA can investigate the
affairs of any insurer if it suspects wrongdoing.
4. Disciplinary Powers
It can impose penalties, revoke licenses, or restrict operations for those violating rules.
5. Power to Approve Mergers or Amalgamations
If two insurance companies want to merge, IRDA’s approval is mandatory to protect
policyholders’ interests.
🛠 Functions of IRDA — The Daily Work at the Control Room
Easy2Siksha.com
While duties define the “why” and powers define the “can”, functions define the “how”.
1. Regulatory Functions
• Framing regulations for insurance operations.
• Approving new insurance products.
• Ensuring compliance with the Insurance Act, 1938, and IRDA Act.
2. Developmental Functions
• Encouraging competition for better services.
• Promoting rural and social sector insurance obligations.
• Supporting the training of insurance professionals.
3. Supervisory Functions
• Monitoring financial health of insurers via periodic reports.
• Conducting inspections and audits.
• Ensuring fair conduct of intermediaries.
4. Protective Functions
• Setting claim settlement timelines.
• Creating grievance redressal mechanisms like the Integrated Grievance Management
System (IGMS).
• Ensuring transparency in policy terms.
5. Investment Oversight
• Laying down norms for insurer investments to balance safety and returns.
• Preventing reckless or high-risk investments.
A Day in the Life — Story Example
Meera, now an insurance policyholder, faces a claim dispute when her health insurer delays
payment. Instead of feeling helpless, she turns to the grievance system regulated by IRDA.
The insurer, aware of IRDA’s penalties for delays, quickly processes her claim.
This small story shows how IRDA’s presence indirectly safeguards millions — just like a
station master whose vigilance prevents accidents before they happen.
Why IRDA Matters to the Examiner (and the Nation)
For the examiner, your understanding of IRDA should show:
• Clarity: You know the difference between duties, powers, and functions.
Easy2Siksha.com
• Relevance: You understand why it’s necessary.
• Practical Insight: You can connect theory with real-life examples.
Exam-Friendly Recap Table
Aspect
Key Points
Duties
Protect policyholders, regulate industry, promote growth, ensure stability
Powers
Licensing, regulation-making, investigation, penalties, merger approvals
Functions
Regulatory, developmental, supervisory, protective, investment oversight
Closing Thought
The IRDA is like an ever-alert station master of India’s insurance express — it ensures the
journey is safe, fair, and reaches every corner of the country. Without it, the system could
descend into chaos, with passengers (policyholders) left stranded. With it, there’s order,
trust, and growth.
SECTION-D
7. Give an overview of capital market instruments. Explain by citing examples.
Ans: The Fairground Lesson on Capital Market Instruments
At the fair, you see two main sections:
1. The permanent stalls — where traders sell valuable goods year after year.
2. The seasonal game booths — with short-term games and quick wins.
This, in a way, mirrors the capital market. The capital market is the place where long-term
financial securities are bought and sold. Just as the fair connects buyers and sellers of goods,
the capital market connects investors (those who have money) with borrowers (those who
need money).
Within this market, the “goods” are not candyfloss or toys — they are capital market
instruments: the tools through which money flows between savers and users of funds.
What are Capital Market Instruments?
They are the financial products used to raise funds in the capital market. Some are like
sturdy investments you keep for years, while others are more adventurous, with varying
risks and rewards.
Think of them as different “rides” at our fair — some slow and scenic, others fast and
thrilling.
Easy2Siksha.com
🛤 Types of Capital Market Instruments
Capital market instruments broadly fall under two categories:
1. Primary Market Instruments — where securities are issued for the first time.
2. Secondary Market Instruments — where existing securities are bought and sold
between investors.
But for a better understanding, we can classify them as ownership-based and debt-based,
along with some hybrids.
1. Equity Shares — The Ownership Ride
Owning an equity share is like buying a tiny portion of the “stall” itself.
• Meaning: Equity shares represent ownership in a company. When you buy equity
shares, you become a part-owner (shareholder).
• Returns: You earn through dividends (a share of the profits) and capital gains (selling
your shares at a higher price).
• Example: If you buy shares of Infosys, you own a fraction of that company.
• Risk: High returns potential but also high risk — if the company does badly, the share
price can fall.
Story angle: Meera, a friend of ours, bought shares of a young tech startup. Over 5 years,
the company grew rapidly, and her investment doubled. But she knows it could have gone
the other way too — that’s the thrill and risk of the equity ride.
2. Debentures and Bonds — The Ferris Wheel of Fixed Returns
Unlike equity, debentures and bonds don’t give you ownership — they make you a lender.
• Meaning: These are debt instruments where investors lend money to a company or
government in exchange for regular interest and repayment at maturity.
• Returns: Fixed interest income.
• Example: Government bonds, corporate debentures.
• Risk: Generally safer than equity, but not risk-free — if the issuer defaults, you may
lose money.
Story angle: Imagine lending the fair organiser ₹10,000 to build a new ride, with the
promise they’ll pay you ₹1,000 every year and return your money after 5 years. That’s a
bond.
3. Preference Shares — The VIP Pass 🎟
Preference shares combine features of both equity and debt.
Easy2Siksha.com
• Meaning: Shareholders get preference over equity shareholders in receiving
dividends and during liquidation.
• Returns: Fixed dividend (like interest) but usually no voting rights.
• Example: A company issues 1,000 preference shares at ₹100 each with a fixed 6%
dividend.
• Risk: Lower than equity but higher than bonds.
4. Derivatives — The Thrill Ride
Derivatives are contracts whose value is “derived” from an underlying asset like shares,
commodities, or currencies.
• Meaning: Investors use them for hedging (reducing risk) or speculation (betting on
price movements).
• Examples: Futures, options, forwards, swaps.
• Risk: High — can lead to big profits or losses quickly.
Story angle: It’s like betting that a game at the fair will be more popular next week —
without actually owning the game booth.
5. Mutual Funds — The Group Tour Bus
• Meaning: Pooling money from many investors to invest in a diversified portfolio
managed by professionals.
• Example: Equity mutual funds, debt mutual funds, hybrid funds.
• Risk: Varies depending on the type of fund.
Story angle: Instead of buying each ride ticket separately, you buy a pass that lets you enjoy
many rides — and an expert guide chooses the best ones for you.
6. Exchange-Traded Funds (ETFs) — The Pre-Planned Route Map 🗺
• Meaning: Investment funds traded on stock exchanges, combining features of
mutual funds and shares.
• Example: Nifty 50 ETF.
• Risk: Market-linked, but with built-in diversification.
7. Government Securities (G-Secs) — The Safe Carousel
• Meaning: Debt instruments issued by the government, considered very safe.
• Example: Treasury bills, dated securities.
• Risk: Low — backed by the government.
Easy2Siksha.com
Importance of Capital Market Instruments
1. Mobilising Savings: Encourages people to invest idle money productively.
2. Providing Liquidity: Investors can buy/sell instruments easily in the secondary
market.
3. Encouraging Growth: Companies raise capital for expansion.
4. Wealth Creation: Helps individuals grow their money over time.
Real-Life Example in the Indian Context
In 2020, when the Indian government needed funds to tackle pandemic challenges, it issued
special government securities. At the same time, many private companies raised funds via
rights issues and debenture issues to keep operations running. This showed how different
instruments serve different needs in the economy.
Exam-Ready Recap Table
Instrument
Nature
Returns
Risk Level
Example
Equity Shares
Ownership
Dividends +
Capital Gains
High
Infosys shares
Bonds/Debentures
Debt
Fixed Interest
Low-
Medium
SBI Bonds
Preference Shares
Hybrid
Fixed Dividend
Medium
Company-issued
preference stock
Derivatives
Contract
Variable
Very High
Nifty Futures
Mutual Funds
Pooled
Investment
Market-linked
Varies
HDFC Equity Fund
ETFs
Hybrid
Market-linked
Medium
Nifty 50 ETF
G-Secs
Debt
Fixed
Low
10-year G-Sec
Closing Thought
The capital market is like that lively fair — full of choices, each offering a different mix of
excitement, risk, and reward. Whether you’re the adventurous type who loves the roller
coaster of equities and derivatives, or the steady rider who prefers the carousel of
government bonds, there’s a place for everyone.
The real skill lies in knowing which ride to take, for how long, and at what cost — that’s
what makes a great investor.
Easy2Siksha.com
8. "FII's and FDI's play a significant role in the development of economy." Justify.
Ans: FII’s and FDI’s play a significant role in the development of economy – Justify
Imagine you are the captain of a ship. Your ship is strong, but the journey of the ocean is
long. To make the ship faster, stronger, and capable of carrying more passengers, you need
two kinds of support:
1. Some people invest directly in building the ship itself (they may buy new engines,
sails, or cabins).
2. Some people just put their money on your ship’s journey for profit (they buy tickets
or sponsor small trips but can leave anytime).
In the world of economics, these two supporters are FDI (Foreign Direct Investment) and FII
(Foreign Institutional Investors). Both play an important role in making a country’s economy
grow, just as both kinds of supporters help a ship reach its destination successfully.
Now, let us slowly unfold this story of FDI and FII and see why they are so important for the
development of an economy.
1. Understanding FDI and FII in Simple Words
• Foreign Direct Investment (FDI):
This is when a company or individual from another country invests directly in
building something inside our country—like a factory, office, technology park, or
even infrastructure like airports and roads. For example, when Hyundai set up its car
manufacturing plant in India, that was FDI.
• Foreign Institutional Investment (FII):
This is when foreign investors—like big banks, mutual funds, hedge funds, or
financial institutions—buy shares and bonds in the Indian stock market. They don’t
build factories but they invest money in our companies for profit. For example, when
a US-based fund buys shares of Infosys or Reliance, that is FII.
FDI is like a long-term marriage with commitment, while FII is more like a short-term
friendship—it can change quickly depending on mood and market.
2. Why Do Countries Need FDI and FII?
Every country wants to grow its economy, create jobs, build infrastructure, and improve
living standards. But sometimes, domestic savings and investments are not enough. That’s
where foreign money becomes a booster dose.
• FDI brings technology, jobs, and infrastructure.
• FII brings liquidity, confidence, and capital for companies.
Easy2Siksha.com
Together, they push the economy forward.
3. The Story of Two Villages (A Small Analogy)
Once there were two villages—Village A and Village B.
• Village A relied only on its own people’s money. They saved, invested, and built
things slowly. Development was happening but at a snail’s pace.
• Village B, on the other hand, welcomed outsiders to invest. Some outsiders built
mills, schools, and hospitals (FDI). Some others just put money in Village B’s market
stalls (FII). As a result, Village B grew faster—people had jobs, roads were better, and
businesses flourished.
But there was a catch. Sometimes, the outsiders who had put money in market stalls (FII)
would take it back suddenly, making Village B’s market unstable. Still, because the outsiders
who built mills and schools (FDI) stayed committed, the village continued to grow in the long
run.
This story mirrors the role of FII and FDI in real economies.
4. Contribution of FDI to Economic Development
FDI is like planting a tree—it takes time, but once grown, it gives fruits for many years.
Here’s how it helps:
1. Employment Generation:
When multinational companies like Amazon, Microsoft, or Hyundai open offices or
factories, thousands of jobs are created directly and indirectly.
2. Technology Transfer:
FDI brings modern machines, production methods, and managerial skills. For
example, India’s automobile industry grew rapidly because of foreign companies
bringing world-class technology.
3. Infrastructure Development:
FDI in roads, airports, and ports improves connectivity and boosts trade. For
instance, foreign firms investing in metro projects improve urban transport.
4. Improved Exports and Balance of Payments:
Many foreign companies produce in India and export abroad. This improves India’s
trade balance and brings valuable foreign exchange.
5. Boost to Local Industry:
FDI often creates linkages with local suppliers. For example, when a car company
sets up a plant, hundreds of small local suppliers also get contracts.
Easy2Siksha.com
5. Contribution of FII to Economic Development
FII is like rain—it comes quickly, boosts crops, but may also stop suddenly. Still, it plays a
vital role:
1. Liquidity in Stock Market:
When foreign investors buy shares, the stock market becomes more active and
liquid. This helps companies raise money easily.
2. Improves Investor Confidence:
If big global investors put money in India, even domestic investors feel confident to
invest.
3. Strengthens Currency and Reserves:
When FIIs bring dollars into India, the value of Indian currency improves, and forex
reserves increase.
4. Encourages Better Governance:
Foreign investors prefer transparency. So companies improve their accounting and
governance standards.
6. Challenges and Risks
While both FDI and FII are beneficial, they are not free of problems:
• For FDI: Sometimes foreign companies dominate local markets, reducing
opportunities for small domestic businesses.
• For FII: Sudden withdrawal of funds (called capital flight) can destabilize stock
markets and currency.
For example, during the 2008 Global Financial Crisis, FIIs withdrew large amounts from
India, leading to stock market crashes.
7. India’s Experience with FDI and FII
India is one of the top destinations for FDI and FII.
• FDI Success Stories: Companies like Maruti-Suzuki, Hyundai, and Nokia transformed
industries in India.
• FII Impact: FIIs have played a major role in boosting Indian stock markets, making
them one of the fastest growing in the world.
8. Balancing Both for Growth
Easy2Siksha.com
An ideal economy needs both:
• FDI for long-term strength.
• FII for short-term energy and growth.
Just like a human body needs both regular meals (FDI) and quick snacks (FII), an economy
grows when it gets a balance of both.
Conclusion
To conclude, FDI and FII act as two powerful engines driving the ship of economic
development.
• FDI builds industries, creates jobs, and brings stability.
• FII brings quick money, liquidity, and investor confidence.
However, the country must create policies that attract both, while also protecting itself from
risks.
In short, if FDI is the foundation stone of long-term growth, FII is the fuel that keeps the
engine running smoothly in the short term. Together, they make the economy strong,
competitive, and ready to face the future.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
