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GNDU Question Paper-2023
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. (i) Describe the major functions of Indian financial system.
(ii) "Indian financial system has changed over years." Discuss the major revolutions in this
sector over last five years.
2. What are the major types of financial market? Discuss the similarity and difference
among the major types of financial market.
SECTION-B
3. "Money market is a market for dealing with financial assets and securities having
maturity period of upto one year." Discuss the statement in the light of structure of
money market.
4. What are non banking institutions? Highlight its major categories with suitable
examples.
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SECTION-C
5. "Mutual funds are good source of investment." Discuss the statement by highlighting
the major categories of mutual fund along with their benefits.
6. Explain the historical background of insurance industry in India. What are the major
duties, powers and functions of IRDA?
SECTION-D
7.(i) What are the various avenues of entering into foreign market? Explain.
(ii) Differentiate between FDI and FII along with their importance.
8. "Financial instruments are an important part of Indian Financial System." Elaborate this
statement with respect to the different categories of financial instruments.
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GNDU Answer Paper-2023
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. (i) Describe the major functions of Indian financial system.
(ii) "Indian financial system has changed over years." Discuss the major revolutions in this
sector over last five years.
Ans: Part I — The Major Functions of the Indian Financial System
They begin at the RBI headquarters. Mr. Menon smiles and says:
“Aarav, think of the Indian financial system as the country’s bloodstream. Money is like the
blood — it needs to circulate efficiently for the body (the economy) to stay healthy. Every
institution here plays a role in moving, directing, and protecting that flow.”
He explains the core functions, not as bullet points but as “stops” on their tour.
1. Mobilizing Savings → Channeling Money into Investments
Their first stop is a public sector bank. People are lined up at counters, depositing their
salaries. Mr. Menon says:
• Banks, post offices, mutual funds, insurance companies — all encourage people to
save.
• These savings don’t just sit idle; they are channelled into investments — loans for
businesses, mortgages, infrastructure projects.
Without this function, India’s wealth would remain under mattresses, not powering new
factories or metro lines.
2. Facilitating Payments and Settlements
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They step into a digital payments start-up office with screens showing millions of real-time
transactions.
• Every time someone uses UPI, NEFT, credit cards, or mobile wallets, the financial
system is acting as a bridge between buyer and seller.
• This function keeps commerce smooth, reduces cash handling, and speeds up the
economy.
Aarav notes that India is now a world leader in digital payments, thanks to UPI.
3. Allocating Credit Efficiently
Their next stop is a small NBFC (Non-Banking Financial Company) lending to women
entrepreneurs in rural Maharashtra.
• The financial system decides where credit should flow — to big corporations,
MSMEs, agriculture, housing, or exports.
• Priority Sector Lending norms ensure even neglected areas get funds.
This allocation shapes the future of industries and regions.
4. Managing Risk
They visit an insurance company. Mr. Menon explains:
• Life, health, crop, and general insurance transfer risk from individuals and businesses
to insurers.
• Financial markets also offer hedging tools like derivatives to manage price risks.
For a farmer or exporter, this can mean the difference between survival and bankruptcy in
tough years.
5. Price Discovery
At the Bombay Stock Exchange (BSE), giant ticker boards flash share prices.
• Markets gather buy-and-sell information and arrive at prices for shares, bonds, and
commodities.
• Transparent price discovery attracts both domestic and foreign investors.
6. Providing Liquidity
Liquidity means you can convert assets to cash quickly without big loss.
• Stock markets, government securities markets, and even mutual fund redemptions
ensure that investors can exit when needed.
Without liquidity, investors hesitate to commit money.
7. Maintaining Financial Stability
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Finally, they return to RBI. Mr. Menon says:
• Regulators like RBI, SEBI, IRDAI, and PFRDA monitor and supervise institutions to
avoid crises.
• Stability builds confidence — both for citizens and foreign investors.
Aarav realises: The Indian financial system is not just about “money”; it’s about ensuring
money flows to the right places, safely, and in a way that grows the economy while
protecting people’s trust.
Part II — How the Indian Financial System Has Changed in the Last 5 Years
Mr. Menon laughs:
“If you think what you see today is how it’s always been, you’d be mistaken. In just the last
five years, we’ve witnessed revolutions — not slow changes — that have transformed
finance in India.”
They sit at a café, and he begins to recount the big transformations.
1. The UPI Revolution & Digital Payments Boom
• Five years ago, UPI was growing fast — but today it’s the backbone of everyday
transactions from street chaiwalas to luxury malls.
• Low-cost, real-time transfers changed how India moves money.
• Interoperability between apps, QR codes at every corner shop, and integration with
global systems (like UPI-Singapore’s PayNow link) made digital payments borderless.
• This shift reduced cash dependency and brought more people into formal finance.
Impact Story: In rural Bihar, a vegetable seller now accepts digital payments, builds
transaction history, and uses it to get a microloan — something unimaginable a decade ago.
2. Rise of Fintech Lending & Neobanks
• Fintech companies now use alternative credit scoring (based on phone bills, e-
commerce history) to lend to those without traditional credit scores.
• Neobanks — fully digital, branchless banks — offer personalised apps, instant
account opening, and AI-driven budgeting advice.
• Regulatory sandboxes allow innovation while protecting consumers.
3. Mutual Fund & Retail Investment Explosion
• Platforms like Zerodha, Groww, and Paytm Money made investing in stocks and
mutual funds easy and nearly paperless.
• SIP (Systematic Investment Plans) culture has deepened — even middle-income
households are monthly investors now.
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• Direct equity participation by young investors surged, supported by real-time online
trading and educational content.
4. Insurance Expansion & Health-Tech Integration
• COVID-19 accelerated health insurance adoption.
• Digital-first insurance providers now issue policies in minutes.
• Wearable devices track health metrics and can influence premium discounts.
• Crop insurance schemes linked with satellite data help farmers file quick claims.
5. Green Finance & ESG Investing
• New focus on financing sustainable projects — from solar parks to electric mobility.
• Sovereign Green Bonds launched to fund eco-friendly infrastructure.
• ESG (Environmental, Social, Governance) funds attracting both Indian and foreign
capital.
6. Regulatory Modernisation
• RBI introduced frameworks for digital lending to curb malpractices.
• SEBI improved investor protection with stricter disclosure norms, faster settlement
cycles (T+1), and tighter mutual fund rules.
• Account Aggregator framework launched — allowing individuals to share their
financial data securely across banks, insurers, and investment platforms with
consent.
7. Financial Inclusion Push via Jan Dhan 2.0
• Nearly every household now has a bank account, many linked to Aadhaar and mobile
numbers.
• These accounts are used for direct benefit transfers, subsidies, pensions — cutting
leakages dramatically.
• New micro-insurance and pension schemes target gig workers and unorganised
sector employees.
8. Cryptocurrency Regulation Steps ₿
• Crypto boomed among retail investors, prompting RBI and government caution.
• Virtual Digital Asset (VDA) taxation framework introduced.
• Work underway for the Central Bank Digital Currency (CBDC) or digital rupee — a
sovereign, stable digital alternative.
9. Rural Credit Digitisation
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• Kisan Credit Cards, agricultural loans, and cooperative bank services going online.
• Use of drone surveys and satellite data for loan appraisal and crop monitoring.
10. Global Integration
• Inclusion of Indian government bonds in major global bond indices attracts foreign
institutional investors.
• Cross-border payment linkages (UPI with other countries) speed up remittances.
Why These Changes Matter
Mr. Menon summarises for Aarav:
• Efficiency: Transactions are faster, cheaper, and more transparent.
• Inclusion: Millions brought into formal finance.
• Trust: Stronger regulations and better governance.
• Opportunity: More ways for individuals and businesses to access capital.
Aarav realises he’s not just witnessing an economic system — he’s living through a
transformation that future textbooks will write about.
Final Takeaway (Humanised)
The Indian financial system’s major functions — mobilising savings, enabling payments,
allocating credit, managing risk, discovering prices, ensuring liquidity, and maintaining
stability — are like the invisible gears of a giant clock, keeping the nation’s economy on
time.
But in the past five years, the clock hasn’t just kept ticking — it’s been upgraded with digital
precision, broader reach, and sustainable vision.
From the chaiwala with a QR code to the global investor buying Indian green bonds, from a
gig worker getting insured in minutes to a rural artisan selling through e-commerce with
instant digital payments — the system now touches every life, every day, everywhere.
And just like that, Aarav’s first day in finance ends not with pages of definitions, but with the
realisation that this system is India’s economic heartbeat — evolving, adaptive, and, in its
own way, deeply human.
2. What are the major types of financial market? Discuss the similarity and difference
among the major types of financial market.
Ans: A Train Ride to Mumbai’s Dalal Street
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It’s early morning, and a college student named Riya is on a train to Mumbai. She’s
preparing for her finance exam, flipping through notes, when an elderly gentleman sitting
beside her notices her textbook.
• He smiles and says, “Ah, nancial markets. I’ve spent 30 years working in them. Want
to hear how they really work?”
• Riya nods eagerly. And just like that, her textbook transforms into a story — one
that’s vivid, human, and unforgeable.
Understanding Financial Markets: The Lifeblood of the Economy
The gentleman begins:
“Imagine the economy as a giant city. Roads connect people, goods, and services. Now
imagine money flowing through those roads — that’s what financial markets do. They
connect people who have money with those who need it.”
In simple terms, financial markets are platforms where buyers and sellers trade financial
assets like stocks, bonds, currencies, and derivatives. These markets help in raising capital,
transferring risk, discovering prices, and ensuring liquidity.
But there isn’t just one kind of financial market. There are many — each with its own
purpose, players, and personality.
Types of Financial Markets — A Guided Tour
The gentleman pulls out a pen and begins sketching on Riya’s notebook. “Let me walk you
through the major types,” he says.
1. Capital Market
This is the market where long-term financial instruments are traded — typically for more
than one year.
Two key segments:
a) Primary Market
• Where companies issue new securities to raise funds.
• Think of it as a “birthplace” for shares and bonds.
• Example: When a company launches an IPO (Initial Public Offering), it’s using the
primary market.
Why it matters: It helps businesses grow and governments fund infrastructure.
b) Secondary Market
• Where existing securities are traded among investors.
• Think of it as a “stock exchange” — like BSE or NSE.
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• Investors buy and sell shares without involving the issuing company.
Why it matters: It provides liquidity and allows price discovery.
2. Money Market
This is the market for short-term funds — typically for less than one year.
Instruments include:
• Treasury Bills
• Commercial Papers
• Certificates of Deposit
• Repurchase Agreements (Repos)
Participants:
• Banks, financial institutions, corporations, and the government.
Why it matters: It helps manage short-term liquidity and working capital needs. For
example, if a company needs funds for 3 months, it can issue commercial paper.
3. Foreign Exchange Market (Forex Market)
This is where currencies are bought and sold.
Example:
• An importer in India needs to pay a supplier in the US. They’ll need to buy US dollars
using Indian rupees.
Why it matters:
• Facilitates international trade and investment.
• Helps in currency conversion and hedging against exchange rate risks.
Fun fact: The forex market is the largest financial market in the world — with daily
transactions exceeding $6 trillion!
4. Derivatives Market
This market deals with financial instruments whose value is derived from an underlying
asset — like stocks, bonds, commodities, or currencies.
Common derivatives:
• Futures
• Options
• Swaps
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Why it matters:
• Helps investors hedge risks.
• Allows speculation and price prediction.
Example: A farmer can lock in a price for his crop using a futures contract, protecting
himself from price drops.
5. Commodity Market
This is where raw materials and primary products are traded.
Two types of commodities:
• Hard commodities: Gold, oil, metals
• Soft commodities: Wheat, coffee, cotton
Why it matters:
• Helps producers and consumers manage price risks.
• Influences global trade and inflation.
Example: MCX (Multi Commodity Exchange) in India is a major platform for commodity
trading.
6. Insurance Market
Though not always listed under financial markets, it plays a crucial role in risk management.
How it works:
• Individuals and businesses pay premiums to insurers.
• In return, they get financial protection against losses (like accidents, illness, or
natural disasters).
Why it matters:
• Promotes financial stability.
• Encourages investment by reducing uncertainty.
7. Mortgage Market
This market deals with long-term loans secured by real estate.
Participants:
• Homebuyers, banks, housing finance companies.
Why it matters:
• Enables home ownership.
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• Fuels construction and real estate sectors.
8. Cryptocurrency Market ₿
A relatively new entrant, this market deals with digital assets like Bitcoin, Ethereum, and
others.
Why it matters:
• Offers decentralized finance (DeFi) options.
• Attracts tech-savvy investors and innovators.
Caution: Highly volatile and still evolving in terms of regulation.
How These Markets Interact
The gentleman draws a web on Riya’s notebook.
“These markets don’t work in isolation. They’re like organs in a body — each with a role, but
all connected.”
• A company might raise funds in the capital market, manage short-term needs in the
money market, hedge risks in the derivatives market, and insure assets in the
insurance market.
• An investor might diversify across stocks, bonds, commodities, and even crypto.
Why Students Should Care
• Riya asks, “But why should I remember all this?” The gentleman replies:
“Because understanding financial markets helps you understand the world. Every budget,
every investment, every economic policy — they all flow through these markets.”
Whether you’re a future entrepreneur, policymaker, or investor, knowing how these
markets work gives you the power to make informed decisions.
SECTION-B
3. "Money market is a market for dealing with financial assets and securities having
maturity period of upto one year." Discuss the statement in the light of structure of
money market.
Ans: Imagine you are in a big city where there are two main marketplaces. One is for buying
long-lasting things like houses, land, or big machines. The other is for short-term needs –
like renting a scooter for a week, borrowing money for a month, or buying groceries for just
today.
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In the world of finance, the capital market is like that first marketplace – it deals with long-
term investments. But the money market is like the second one – a place for meeting short-
term financial needs.
The money market is, therefore, a market where people, businesses, and even governments
deal in financial assets and securities that have a maturity period of up to one year. This
means no permanent borrowing, no long-term deals, but only temporary arrangements to
manage quick needs of cash and liquidity.
Why do we need such a market?
Think of a businessman who has to pay his workers today but will receive money from his
clients after 20 days. Or imagine the government, which needs funds to pay for a sudden
project but will collect taxes only after a few months. Both cannot wait, and both do not
need money forever – they just need it for the short term. This is where the money market
comes to the rescue.
So, the money market is like a safety net, ensuring that no one faces a liquidity crunch, as
long as they are trustworthy and follow the rules.
Structure of the Money Market
Now let’s open this “marketplace” and see its different stalls and players, just like a fair. The
money market is not one single physical place but a network of institutions, instruments,
and participants. Its structure can be explained through its two parts: the organized sector
and the unorganized sector.
1. Organized Sector
This is the official, well-regulated part of the money market. It is controlled mainly by the
Reserve Bank of India (RBI) in our country. Think of it like the well-lit, licensed shops in a
marketplace where everything happens under rules and supervision.
In the organized sector, we find:
• Reserve Bank of India (RBI): The RBI is like the manager of the entire market. It
regulates the flow of money, ensures stability, and acts as the lender of last resort.
• Commercial Banks: They are the main players, borrowing and lending money for
short periods. If a company needs funds for 3 months, it can approach these banks.
• Co-operative Banks & Development Banks: They also operate here, catering to
smaller borrowers or specific industries.
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• Financial Institutions: Like LIC, GIC, mutual funds, etc., they invest in short-term
instruments for managing their cash balances.
2. Unorganized Sector
This is the informal part of the market, like small stalls or street vendors in our fair. It
includes:
• Moneylenders
• Indigenous bankers
• Chit funds
• Private financiers
Although they are not officially controlled by the RBI, they still play a role, especially in rural
and semi-urban areas, where people cannot always access organized banking.
Instruments of the Money Market
Just like different items are sold in a fair, the money market also has its own instruments.
These are the tools through which short-term borrowing and lending take place. Let’s walk
through them one by one:
1. Treasury Bills (T-Bills):
Issued by the government, these are like IOUs for a few weeks to a year. They are
considered the safest because the government promises repayment.
2. Commercial Papers (CP):
Big companies often need short-term funds. Instead of borrowing from banks, they
can issue these papers to investors.
3. Certificates of Deposit (CD):
These are time deposits issued by commercial banks, promising repayment after a
short period.
4. Call Money Market:
This is like borrowing for a single day. Banks often lend to each other overnight to
maintain liquidity.
5. Repurchase Agreements (Repos):
These are short-term loans where securities are sold with an agreement to buy them
back later.
6. Trade Bills / Bill of Exchange:
When sellers don’t receive cash immediately, they can draw a bill of exchange and
get it discounted in the money market for instant cash.
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Importance of the Money Market
Now that we know the structure, let’s see why this market is so important:
• It helps businesses meet short-term needs.
• It provides the government with quick funds without raising long-term loans.
• It supports banks by maintaining their day-to-day liquidity.
• It allows investors to park their surplus funds safely for short periods.
• It ensures the overall economic stability of the country by balancing the demand and
supply of money.
Linking Back to the Statement
The statement said: “Money market is a market for dealing with financial assets and
securities having maturity period of up to one year.”
From our discussion, it is clear that:
• The money market indeed deals only in short-term instruments (not more than one
year).
• Its structure includes organized and unorganized sectors.
• It operates through various instruments like T-Bills, CPs, CDs, etc.
• It serves as the lifeline of liquidity for the economy.
So yes, the statement perfectly captures the essence of the money market.
Conclusion
To sum up, the money market is like the “short-term bazaar” of the financial world. Its well-
structured stalls – RBI, banks, financial institutions, and money market instruments – ensure
that money keeps flowing smoothly in the economy. It is not about long-term investments
but about providing quick cash solutions for immediate needs. Without it, the financial
system would be like a car without fuel – unable to move even if the engine (capital market)
is strong.
Thus, the money market, through its structure and instruments, proves that it is indeed the
market for financial assets and securities with maturity up to one year.
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4. What are non banking institutions? Highlight its major categories with suitable
examples.
Ans: A Simple Story to Understand Non-Banking Institutions
Imagine a small town called Financia. In this town, people need money for all sorts of
things—building houses, starting businesses, buying scooters, paying for college, or even
saving money safely. Now, in Financia, there is a big and shiny bank in the middle of the
town. Everyone knows that if you want to keep your money safe, open a savings account, or
take a loan, you go to the bank.
But here’s the twist—not all financial needs of people can be fulfilled by the bank alone.
Banks usually follow very strict rules and focus only on certain activities. So what about the
person who wants to buy a car on installment? Or someone who needs insurance for their
shop? Or the farmer who wants a tractor loan but doesn’t fit into the bank’s criteria?
This is where the heroes of our story enter—Non-Banking Financial Institutions (NBFIs). They
are like cousins of banks. They don’t work exactly like banks, but they provide different
financial services that make life easier for people.
So, What Are Non-Banking Institutions?
Non-banking institutions are organizations that offer financial services just like banks, but
they are not officially banks. In simple words, they cannot accept traditional demand
deposits like savings or current accounts, but they can perform many other financial
activities such as lending money, investing funds, leasing, insuring lives and properties, and
even managing investments.
Think of them as specialized shops in a financial marketplace. While banks are like
supermarkets that sell all basic items, non-banking institutions are like stores that focus on
specific things—insurance, hire purchase, housing finance, mutual funds, etc.
Why Do We Need Them?
Let’s go back to Financia town. Suppose a family wants to buy a new car. If they go to the
bank, it might take weeks of paperwork and still no guarantee of approval. But a finance
company in town might quickly offer them a car loan with easy installments. Similarly, when
people want to insure their crops or houses, they go to an insurance company instead of the
bank.
This shows that NBFIs fill the gaps left by banks. They make financial services more flexible,
accessible, and specialized.
Major Categories of Non-Banking Institutions (with Examples)
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Let’s now walk through the main types of non-banking institutions, as if we are visiting
different shops in Financia’s financial marketplace.
1. Insurance Companies
These are like safety nets. They protect people from unexpected losses.
• What they do: Provide insurance against risks such as accidents, theft, fire, crop
failure, health problems, or death. People pay a small premium, and in case of loss,
they receive compensation.
• Examples:
o Life Insurance Corporation of India (LIC) – provides life insurance policies.
o New India Assurance – provides general insurance like car or home
insurance.
Story moment: Imagine Ramesh, who drives a taxi. One day his car meets with an accident.
Instead of losing all his savings to repair it, his insurance company pays for the damages.
That’s the magic of insurance!
2. Investment Companies / Mutual Funds
These institutions act like treasure managers.
• What they do: Collect money from small investors and invest it in shares, bonds, or
government securities. This way, even a person with ₹500 can indirectly invest in big
companies.
• Examples:
o UTI Mutual Fund
o HDFC Mutual Fund
Story moment: Meena, a schoolteacher, wants to invest but doesn’t understand the stock
market. By investing in a mutual fund, her small savings grow safely because experts
manage the money.
3. Finance Companies / Hire Purchase & Leasing Companies
These are like friends who help you buy something today and pay later in installments.
• What they do: Provide loans for vehicles, machines, or consumer goods. Leasing
companies even let people use equipment by paying rent instead of buying it.
• Examples:
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o Bajaj Finance – famous for consumer loans.
o Tata Capital – provides loans and leasing facilities.
Story moment: A shopkeeper wants a fridge to store cold drinks but doesn’t have enough
money to buy it. A finance company gives him the fridge on hire purchase, and he pays
slowly in easy EMIs.
4. Housing Finance Companies
These companies make dreams of owning a home come true.
• What they do: Provide long-term loans for purchasing, building, or renovating
houses.
• Examples:
o HDFC Ltd. (Housing Development Finance Corporation)
o LIC Housing Finance
Story moment: A young couple in Financia wants to buy their first home. With the help of a
housing finance company, they move into their dream house and pay the loan gradually
over 20 years.
5. Development Financial Institutions (DFIs)
These are like builders of the nation.
• What they do: Provide big loans for industries, infrastructure, agriculture, and export
promotion. Their main aim is not profit but development.
• Examples:
o NABARD (National Bank for Agriculture and Rural Development)
o SIDBI (Small Industries Development Bank of India)
o IFCI (Industrial Finance Corporation of India)
Story moment: When Financia’s youth wanted to start a small factory, it was SIDBI that gave
them funds to buy machines and expand employment.
6. Pension Funds
These are the caretakers of old age.
• What they do: Collect contributions during a person’s working years and provide
pensions after retirement.
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• Examples:
o Employees’ Provident Fund Organisation (EPFO)
o National Pension System (NPS)
Story moment: After 35 years of working in a textile mill, Mr. Sharma retired. His pension
fund ensures that every month he receives a steady income even without working.
The Bigger Picture
From these stories, it’s clear that non-banking institutions are the backbone of a modern
financial system. They complement banks, make financial services more accessible, and help
in economic growth. Without them, many dreams—whether of buying a car, building a
house, securing old age, or protecting crops—would remain incomplete.
Conclusion
Non-banking institutions are like unsung heroes of the financial world. They may not have
the glamorous status of banks, but they silently touch people’s lives in countless ways.
Whether it’s through insurance, mutual funds, housing loans, or development finance, they
are the ones who make finance more human, practical, and approachable.
In short, while banks are the heart of the financial system, non-banking institutions are like
its hands and legs—always at work, always helping people move forward in life.
SECTION-C
5. "Mutual funds are good source of investment." Discuss the statement by highlighting
the major categories of mutual fund along with their benefits.
Ans: Mutual Funds – The Basket of Dreams
Imagine you are walking through a busy marketplace. On your left, there is a fruit seller. He
has arranged a variety of fruits in baskets – apples, bananas, oranges, mangoes, and even
some exotic ones you may not have tried before. Now, instead of buying just one fruit, the
seller gives you a smart option:
“You don’t need to pick only one. Buy this basket, and you’ll get a share of all these fruits.
That way, if one fruit turns out to be sour, the sweetness of the others will balance it out.”
This is exactly how mutual funds work in the world of finance. Instead of you putting all your
money into one stock, one bond, or one company, a mutual fund collects money from many
investors and invests it across a range of securities. This way, your risk is spread out, and
you also get the expertise of professional fund managers who know the market better.
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Now, let’s carefully unwrap this basket of dreams and understand why mutual funds are
considered a good source of investment and what their major categories are.
Why are Mutual Funds a Good Investment?
1. Professional Management
Just like you would trust a chef to prepare a great meal, in mutual funds you trust
fund managers. These experts analyze the market, study companies, track
government policies, and then decide where your money should go. This saves you
from the headache of research.
2. Diversification of Risk
“Don’t put all your eggs in one basket.” Mutual funds live by this proverb. Since the
money is invested in different sectors, industries, and asset classes, the fall of one
does not necessarily mean the fall of all. This balances profit and loss smartly.
3. Liquidity
Imagine if you needed money urgently. With mutual funds, you can redeem your
units (sell your investment) quite easily and get back your money, unlike real estate
or gold which may take time to sell.
4. Accessibility
Mutual funds are not just for millionaires. Even with a small amount like ₹500 or
₹1,000, a student, a salaried person, or even a homemaker can begin investing. This
inclusiveness makes them very popular.
5. Transparency and Regulation
In India, the Securities and Exchange Board of India (SEBI) keeps a close watch on
mutual funds. This means you can trust that your money is not vanishing into thin
air. Regular reports and NAV (Net Asset Value) updates also keep you informed.
Major Categories of Mutual Funds
Now let’s open the basket and see what different “fruits” (categories) mutual funds offer:
1. Equity Mutual Funds – The Growth Seeker
These funds invest mainly in shares of companies. If the companies perform well,
your returns can be very high. However, since stock markets fluctuate, these funds
carry higher risk. They are perfect for young investors who can take risks for long-
term growth.
o Benefit: Potential for very high returns.
o Example: If you invested ₹1,000 in an equity mutual fund 10 years ago, it
might have grown to ₹5,000 or even more depending on market
performance.
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2. Debt Mutual Funds – The Safety Net
These funds put money in safer instruments like government bonds, treasury bills, or
corporate debt. They don’t give extraordinary returns but are steady and reliable,
just like a fixed deposit but often with better flexibility.
o Benefit: Stability and regular income.
o Example: Perfect for retired people who prefer safety over high risk.
3. Hybrid Funds – The Balanced Friend
These funds combine both equity and debt. Imagine you’re eating a balanced diet –
some spicy, some sweet, some healthy. Hybrid funds give you the best of both
worlds – growth from equity and safety from debt.
o Benefit: Moderate risk with balanced returns.
o Example: A working professional in his 30s might choose this to balance
security with growth.
4. Money Market Funds – The Quick Cash
These funds invest in very short-term instruments. They are like parking your money
for a short while, maybe a few weeks or months, and still earning something better
than keeping it idle in a savings account.
o Benefit: High liquidity with decent returns.
o Example: Useful for people who might need money at short notice.
5. Index Funds – The Mirror of the Market
These funds simply copy the stock market index like Sensex or Nifty. They don’t try
to beat the market; they just replicate it.
o Benefit: Low management fee and guaranteed alignment with the market
trend.
o Example: If Nifty grows by 12%, your fund also grows by roughly the same
percentage.
6. Sectoral Funds – The Specialist
These funds invest only in a particular sector like IT, Pharma, Banking, etc. They can
give high returns if that sector is booming, but they can also fail badly if that sector
slows down.
o Benefit: High reward potential in booming sectors.
o Example: During the COVID-19 pandemic, Pharma funds performed very well.
The Human Angle – Why Students Should Care
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You may wonder, “Why should I, as a student, learn about mutual funds?”
Well, here’s the twist. Imagine you start saving just ₹1,000 per month in a mutual fund at
the age of 20. By the time you are 40, with the power of compounding, that small habit
could make you financially independent. Instead of worrying about sudden expenses or job
loss, you would have a financial cushion.
Mutual funds teach us not just about money but about life itself: patience, consistency, and
balance. Just as a student needs to study a little every day for long-term success, small
investments in mutual funds regularly can build a fortune over time.
Conclusion
Mutual funds are like a basket of different fruits – some sweet, some sour, but together
they create a healthy, balanced investment. They are good because they are safe,
accessible, diversified, and managed by professionals. The major categories – equity, debt,
hybrid, money market, index, and sectoral funds – cater to different needs and personalities
of investors.
So, whether you are a young risk-taker, a cautious retiree, or someone in between, there is
a mutual fund for you. In short, mutual funds are not just an investment option; they are a
smart financial friend guiding you toward stability and growth.
6. Explain the historical background of insurance industry in India. What are the major
duties, powers and functions of IRDA?
Ans: The Story of Insurance in India and the Role of IRDA
Imagine you’re living in a small village in India a hundred years ago. Life is uncertain —
farmers worry about their crops, traders fear losing their goods to floods or accidents, and
families constantly think, “What will happen if something unexpected happens to me?”
This basic human worry — the fear of uncertainty — is where the story of insurance begins.
Insurance is nothing but a way of sharing risks, so that no single person has to bear the full
burden of loss. Now, let’s travel through time and understand how the insurance industry
grew in India and how the Insurance Regulatory and Development Authority (IRDA) came
into existence to regulate it.
The Historical Background of Insurance in India
1. The Early Days – Colonial Influence
The seeds of insurance in India were sown during British rule. The very first life
insurance company in India was the Oriental Life Insurance Company, founded in
1818 in Calcutta (now Kolkata). But here’s the catch — this company mainly served
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Europeans living in India, not Indians. In fact, Indian lives were considered “too
risky,” and they were charged much higher premiums.
Later, in 1870, the Bombay Mutual Life Assurance Society was established. This was a
turning point because it was the first company to serve Indian lives at normal rates. Slowly,
more companies came up, and life insurance started becoming more popular.
2. Growth and Challenges in the Early 20th Century
By the early 1900s, dozens of life insurance companies were operating. However,
there was no proper regulation. Many companies were financially unstable, and
some even cheated people. To protect the public, the Indian Life Assurance
Companies Act was passed in 1912, the first law to regulate insurance business in
India.
Later, in 1938, the government passed the Insurance Act, which gave stricter control over
insurers and tried to bring more discipline into the sector.
3. Nationalisation Era
After independence, the government realized that insurance is too important to be
left in private hands alone. So, in 1956, the Life Insurance Corporation of India (LIC)
was created by nationalising around 245 private insurance companies. LIC became
the one and only life insurer in India for decades.
Similarly, in the field of general insurance, the government nationalised private insurers in
1972 and created the General Insurance Corporation of India (GIC), along with four
subsidiaries (like New India Assurance, United India Insurance, etc.).
For many years, insurance remained a government monopoly. While this gave people
security, it also meant there was no competition, and services sometimes became slow and
less customer-friendly.
4. The Liberalisation Phase
The real change came in the 1990s when India opened up its economy. To reform
the insurance sector, the government appointed the Malhotra Committee (1993).
The committee recommended that private players and foreign insurers should be
allowed, but under strict regulation.
This led to the passing of the Insurance Regulatory and Development Authority Act in 1999,
which created an independent body — the IRDA (now IRDAI). From then onwards, both
private and public companies could operate, but under the watchful eyes of IRDA.
Today, India’s insurance industry is a mix of public giants like LIC and many private
companies, offering a wide range of life and non-life insurance products.
The Duties, Powers, and Functions of IRDA
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Now that we know how insurance grew in India, let’s meet the “watchdog” of the industry
— the IRDA. Think of IRDA as a referee in a football match. It doesn’t play the game itself,
but it makes sure that all players follow the rules, no one cheats, and the audience
(policyholders) enjoy fair play.
Here are the major duties, powers, and functions of IRDA, explained in a student-friendly
way:
1. Protecting Policyholders’ Interests
Just like a parent protects a child, IRDA’s primary duty is to protect the interests of
policyholders. It ensures that companies do not mislead people with false promises
and that claims are settled fairly and on time.
2. Licensing and Regulation of Companies
Not every company can start selling insurance. They need a license from IRDA. This
ensures that only financially strong and trustworthy companies are allowed to enter
the industry.
3. Monitoring Financial Stability
Insurance companies collect huge amounts of money as premiums. IRDA makes sure
these funds are invested wisely and safely, so that companies can pay claims when
needed.
4. Promoting Healthy Competition
IRDA encourages competition among insurance companies. Why? Because
competition means better services, innovative products, and fair pricing for
customers.
5. Regulating Premiums and Products
IRDA keeps an eye on the premiums charged by companies to ensure they are
reasonable. It also approves new products before they are launched in the market.
6. Grievance Redressal
If customers have complaints, IRDA provides mechanisms to address them. This
prevents exploitation and builds trust among the public.
7. Encouraging Insurance Awareness
Many Indians, especially in rural areas, still don’t have insurance. IRDA works to
spread awareness so that more people can secure their lives, health, and property.
8. Foreign Participation Control
Since foreign companies are also allowed in India, IRDA ensures that their
participation follows the rules and does not harm national interests.
9. Framing Rules and Guidelines
IRDA has the power to make regulations for almost everything related to insurance
— from how agents are appointed, to how companies must report their financials.
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Conclusion
If we look back, the journey of insurance in India feels like a long story of evolution. From
British companies serving only Europeans, to Indian companies like Bombay Mutual serving
locals, to nationalisation with LIC and GIC, and finally to liberalisation with private and
foreign players — insurance has come a long way.
At every step, people’s needs and the country’s economy shaped its progress. Today, thanks
to IRDA, the industry functions with discipline, transparency, and customer focus. IRDA not
only regulates but also nurtures the growth of insurance so that every Indian can feel more
secure about their future.
In short, insurance in India is like a tree that has grown slowly but steadily, and IRDA is the
gardener who ensures it grows strong, healthy, and beneficial for everyone.
SECTION-D
7.(i) What are the various avenues of entering into foreign market? Explain.
(ii) Differentiate between FDI and FII along with their importance.
Ans: 7. (i) What are the various avenues of entering into foreign market? Explain.
Imagine a young entrepreneur named Aarav who runs a small but successful brand of
organic chocolates in India. His chocolates are loved by people in his hometown, and soon
his dream grows bigger—he wants his chocolates to be tasted in other countries too.
But here comes the real question: How can Aarav enter a foreign market?
He has many doors in front of him, but which one should he choose? Each door represents a
different way of entering into the international market, and each has its own risks, costs,
and rewards.
Let’s walk along with Aarav through these doors one by one and understand them in a story-
like manner.
1. Exporting – The First and Easiest Door
Aarav thinks, “Why not just send my chocolates abroad without setting up anything new
there?”
This is exporting. It is the most common and simplest way to enter a foreign market. There
are two types:
• Direct Exporting: Aarav directly sells his chocolates to shops or customers in another
country.
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• Indirect Exporting: He uses middlemen (like export houses or agents) to sell abroad.
Advantages: Less investment, less risk, and a good way to “test the waters.”
Disadvantages: Limited control over marketing and distribution, and dependence on foreign
agents.
For Aarav, exporting is like dipping his toes in the swimming pool before diving in.
2. Licensing – Renting the Secret Recipe
A foreign company approaches Aarav and says, “We’ll sell your chocolates here if you let
us use your brand name and recipe. We’ll pay you a royalty for each sale.”
This is licensing. In this method, Aarav gives permission to a foreign company to use his
brand name, process, or recipe in exchange for a fee or royalty.
Advantages: Easy way to enter new markets with very little investment.
Disadvantages: Aarav risks losing control over quality, and the foreign company may later
become a competitor.
Think of licensing as lending your bicycle to a friend—they’ll ride it, you’ll earn something,
but you can’t control how carefully they ride it.
3. Franchising – Multiplying the Brand
Now Aarav meets a businessman in Dubai who says, “Open your chocolate café here with
our help. We’ll use your name, menu, and style, but we’ll invest locally.”
This is franchising. It is very similar to licensing but usually involves a complete business
model—including training, processes, and brand image.
Advantages: Faster expansion, low investment for Aarav, brand recognition spreads
worldwide.
Disadvantages: Difficult to control all franchises, and the brand reputation may suffer if one
franchise mismanages.
Franchising is like planting seeds of the same tree in different soils—the tree grows
everywhere but needs good care in each location.
4. Joint Venture – Teaming Up with a Local Partner
Suppose Aarav is unsure about handling the foreign market alone. He partners with a local
chocolate company abroad. Together they form a joint venture—sharing investment,
profits, and risks.
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Advantages: Local partner provides market knowledge, government support, and
distribution networks.
Disadvantages: Conflicts may arise, and profits have to be shared.
A joint venture is like marriage—you gain strength from your partner, but you also have to
adjust and compromise.
5. Wholly Owned Subsidiary – Owning Everything Yourself
Later, Aarav becomes confident and says, “I’ll build my own factory in London and run
everything myself.”
This is a wholly owned subsidiary. Here, the company owns 100% of the foreign operations.
There are two ways:
• Greenfield Investment: Starting from scratch (building a new unit).
• Acquisition: Buying an existing foreign company.
Advantages: Complete control, better profits, brand image remains strong.
Disadvantages: Very costly, risky, and requires deep knowledge of the foreign market.
It’s like shifting to a new city and building your own house there—big rewards but big
responsibilities too.
6. Turnkey Projects – Ready-Made Business for Others
A foreign government may invite Aarav to set up a chocolate plant in their country. He
builds the plant, trains the workers, and after completion, he hands it over to them.
This is a turnkey project—where a company sets up the entire business for another party,
and once it’s “ready to turn the key,” they hand it over.
Advantages: Good for specialized industries (like construction, oil, or chemicals).
Disadvantages: No long-term presence in the foreign market.
For Aarav, it’s like decorating a house for someone else and giving them the keys when it’s
ready.
7. Contract Manufacturing – Producing Abroad
Instead of exporting chocolates, Aarav may hire a factory in another country to produce his
chocolates there under his brand name.
This is contract manufacturing.
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Advantages: Lower production costs, avoids trade barriers, quicker supply.
Disadvantages: Risk of losing product quality control.
It’s like asking someone else to cook using your recipe—you save effort, but the taste may
not always be the same.
Conclusion – Choosing the Right Path
For Aarav, each method is like a different door to enter the international market.
• If he wants low risk and easy entry → Exporting.
• If he wants to expand quickly with little investment → Licensing or Franchising.
• If he wants local support and shared risk → Joint Venture.
• If he wants complete control and strong brand presence → Wholly Owned
Subsidiary.
• If he wants short-term projects → Turnkey Projects.
• If he wants low-cost production abroad → Contract Manufacturing.
In reality, companies often use a mix of these strategies depending on their goals, resources,
and market conditions.
(ii) Differentiate between FDI and FII along with their importance.
Ans: FDI vs FII – Explained Like a Story
Imagine you live in a small town where you and your friends often go to a popular sweet
shop called “Sharma Sweets.” Now, one day you see two different types of people coming
into the shop.
Person A: He loves sweets so much that he decides, “Why not open my own branch of
Sharma Sweets in this town?” He brings money, hires workers, buys land, builds a shop, and
runs it for years.
Person B: On the other hand, another person comes in, buys a box of sweets, eats some,
and then sells the rest to another person in the queue. He enjoys the sweets but never
thinks of staying long-term or opening a branch.
Now, Person A is like FDI (Foreign Direct Investment), while Person B is like FII (Foreign
Institutional Investment). Let’s dive deeper into their differences and why they are both
important.
1. Meaning
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• FDI (Foreign Direct Investment):
This is when a company or individual from one country invests directly into a
business in another country. It usually means buying land, setting up factories,
opening offices, or taking a large stake in a company. FDI is like “settling down” in a
country’s economy.
• FII (Foreign Institutional Investment):
This is when big financial institutions (like mutual funds, hedge funds, insurance
companies) invest money in a country’s stock market or bonds. It’s more like
“parking money” for a while in shares and leaving whenever they want.
2. Nature of Investment
• FDI: Long-term in nature. The investor wants to stay, grow, and contribute to the
business for years. Just like Person A who opened a permanent sweet shop.
• FII: Short-term in nature. These investors enter quickly, take profits, and leave when
the market is down. Just like Person B who only bought sweets for a short while.
3. Control and Influence
• FDI: Since it involves ownership (factories, offices, or large stakes in companies),
investors also get management control and decision-making powers.
• FII: These investors only buy shares in the stock market. They don’t manage the
company directly; they just hold ownership temporarily.
4. Flow of Money
• FDI: Brings stable and long-lasting funds into the country. Even during tough times,
FDIs are less likely to leave because they’ve invested heavily in physical assets.
• FII: Can bring huge money inflows suddenly, but can also leave quickly, which
sometimes creates instability in stock markets.
5. Example
• FDI Example: When Amazon opens warehouses, hires people, and sets up offices in
India – that’s FDI.
• FII Example: When a foreign mutual fund buys shares of Infosys or Reliance in the
Indian stock market – that’s FII.
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6. Importance of FDI
• Employment Generation: FDIs create jobs because companies set up factories,
shops, and offices.
• Technology Transfer: Along with money, foreign companies bring modern
technology and new skills.
• Infrastructure Development: FDIs help in building industries, logistics, and overall
economic growth.
• Stable Economy: Since FDIs are long-term, they provide a strong backbone to the
country’s economy.
7. Importance of FII
• Boosts Stock Market: FIIs increase demand for shares, which helps in raising share
prices.
• Liquidity: With more money flowing into the market, buying and selling shares
becomes easier.
• Global Confidence: If FIIs are investing in a country, it shows that global investors
trust the economic policies of that nation.
• Quick Access to Capital: Companies get funds through stock markets more easily
because FIIs bring huge money inflows.
8. The Key Difference in One Line
FDI is like building a home in a new country, while FII is like booking a hotel room. Both
involve money, but the intention and duration are different.
Conclusion – Why Both Are Needed?
Think of a garden. To grow healthy plants, you need two things:
1. Strong trees (FDI) that stay rooted, give fruits, and provide long-term stability.
2. Seasonal flowers (FII) that come and go, adding beauty and quick growth.
Similarly, a country’s economy needs both:
• FDI for long-term development, jobs, and technology.
• FII for short-term capital, liquidity, and global trust.
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However, over-dependence on FII can be risky because they may exit suddenly during a
crisis, creating a “stock market crash.” On the other hand, FDI is more reliable but takes time
to build.
8. "Financial instruments are an important part of Indian Financial System." Elaborate this
statement with respect to the different categories of financial instruments.
Ans: Financial Instruments in the Indian Financial System
Imagine for a moment that you are planning a big wedding in your family. There are so
many people involved—caterers, decorators, musicians, photographers, and of course, the
guests. To make everything work smoothly, you need a proper system: people who manage
money, those who provide services, and those who invest their time.
Now, think of the Indian Financial System as something like this wedding. It is huge,
interconnected, and involves many players: banks, investors, companies, and regulators. But
what really makes the whole system function effectively are the financial instruments—just
like contracts or agreements in a wedding that ensure everyone knows their role and gets
what they deserve.
So, when we say “Financial instruments are an important part of the Indian Financial
System”, we mean that they act as the backbone—the promises, agreements, and tools
through which money flows from those who have surplus (savers) to those who need funds
(borrowers or investors). Without financial instruments, the system would be chaotic and
uncertain, just like a wedding without proper planning and contracts.
Let’s explore this story deeper by understanding what financial instruments are and how
they can be categorized.
What Are Financial Instruments?
Financial instruments are basically contracts or documents that have monetary value. They
can either represent:
1. An asset for one party (like money to be received), and
2. A liability for the other (like money to be paid).
Think of them as a bridge that connects two parties: one who has money but doesn’t want
to keep it idle, and one who needs money to grow or meet expenses. For example, when
you deposit money in a fixed deposit, the bank promises to pay you back with interest. That
deposit receipt is a financial instrument.
Categories of Financial Instruments
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Just like in a wedding, where you have different groups—caterers, dancers,
photographers—financial instruments too can be grouped into different categories. Each
has its own role to play in keeping the system alive and active.
1. Primary and Secondary Instruments
• Primary Instruments:
These are the first-hand instruments issued by the ultimate borrowers to raise funds.
Examples: shares, debentures, bonds.
Imagine a company issuing shares to the public for the first time (like inviting guests
directly for the wedding).
• Secondary Instruments:
These are the instruments that are created later, often based on the primary
instruments. For example, mutual funds or derivatives.
This is like wedding planners or intermediaries managing arrangements after the first
invitations are sent.
2. Debt Instruments
• These instruments represent a borrowed amount that needs to be repaid.
• Examples: debentures, bonds, treasury bills.
• When the government issues a treasury bill, it is basically borrowing money from the
public and promising to repay with interest.
It’s like borrowing money from a relative to meet wedding expenses with a promise to
return it later.
3. Equity Instruments
• Equity means ownership. When you buy shares of a company, you become a part-
owner.
• You share in profits (dividends) but also face the risk of losses.
Think of this as investing in your cousin’s wedding business. If the business grows, you earn
together; if it struggles, you also bear the loss.
4. Hybrid Instruments
• These are a mix of both debt and equity.
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• Example: convertible debentures (they start as debt but can later be converted into
shares).
It’s like giving money to a wedding caterer as an advance but also having the option to
become a permanent partner in his catering business later.
5. Derivative Instruments
• These derive their value from an underlying asset such as shares, commodities, or
currencies.
• Examples: futures, options, swaps.
It’s like predicting in advance how many guests will attend the wedding and booking food
accordingly. You don’t have the actual guests yet, but your decision depends on expected
outcomes.
6. Foreign Exchange Instruments
• With globalization, companies and investors also need instruments dealing with
different currencies.
• Examples: currency futures, swaps, forward contracts.
This is like inviting international guests to your wedding. You need to manage different
currencies, exchange rates, and payments.
Why Are Financial Instruments So Important in India?
Now that we’ve seen the categories, let’s understand their importance in the Indian
financial system.
1. Channelizing Savings into Investment
Indians are traditionally good savers. But savings sitting idle in lockers don’t help the
economy. Financial instruments like deposits, mutual funds, and shares channel
these savings into productive investments, helping businesses grow.
2. Providing Liquidity
Just like water flowing in pipes keeps a house functional, financial instruments
ensure money keeps circulating in the economy. For example, stock exchanges allow
investors to quickly buy and sell shares, providing liquidity.
3. Risk Management
Life is uncertain, and so are investments. Instruments like insurance, derivatives, and
bonds help reduce and spread risk.
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4. Encouraging Economic Growth
Financial instruments ensure that industries get funds, governments can borrow for
infrastructure, and individuals can invest for their future. This creates jobs, wealth,
and overall development.
5. Regulation and Trust
Instruments are often regulated by SEBI, RBI, or other authorities. This ensures
transparency and builds trust among investors. Without trust, no wedding or
financial system can succeed.
A Small Story to Wrap It Up
Picture this:
Rahul is a young engineer who just got his first salary. Instead of keeping it in cash, he
deposits it in a bank. The bank uses his deposit to lend money to a businessman who wants
to expand his shop. That businessman issues shares to raise more funds, and an investor
buys those shares. To manage risks, another investor purchases derivatives. Meanwhile, the
government issues bonds to build highways.
In all these cases, Rahul’s little deposit indirectly helps in business growth, job creation, and
infrastructure development. This magic happens only because of financial instruments,
which act like invisible threads weaving together millions of small actions into the big
picture of national progress.
Conclusion
To conclude, financial instruments are not just technical documents; they are the lifelines of
the Indian financial system. They connect savers with investors, reduce risks, ensure
liquidity, and promote growth. Without them, the financial system would be like a wedding
without music, food, or planning—chaotic and incomplete.
Thus, the statement “Financial instruments are an important part of the Indian Financial
System” is absolutely true, because they are the channels through which money flows, trust
is built, and the economy moves forward.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
