1. What are non-banking financial companies (NBFCs)?

How are they different from banking

companies? What role do they play in an economy? Non-banking financial companies (NBFCs)
are financial institutions that offer various banking services similar to traditional banks but do not
hold a banking license. They play a crucial role in the financial system of an economy by providing
financial services such as loans, investments, and wealth management. NBFCs differ from banking
companies in several ways, including:
 Regulation: While both banks and NBFCs are regulated, the regulatory framework for
NBFCs is typically less stringent than that for banks.
 Acceptance of Demand Deposits: Banks can accept demand deposits from the public, while
NBFCs cannot. This means that NBFCs cannot create money through the process of credit
creation as banks can.
 Access to Central Bank Facilities: Banks have access to central bank facilities like the
lender of last resort, which is not available to NBFCs.
 Credit Creation: Banks can create credit by lending out a multiple of their deposits, while
NBFCs primarily lend from the funds they have raised from various sources.
The role of NBFCs in an economy is significant. They help in increasing financial inclusion, supporting
small and medium-sized enterprises (SMEs), providing credit to underserved and unbanked populations, and
promoting economic growth by supplementing the role of traditional banks.

2. What are the benefits of investing in mutual funds? Explain any four mutual fund schemes.
Benefits of investing in mutual funds include:
 Diversification: Mutual funds pool money from multiple investors to invest in a diversified
portfolio of stocks, bonds, or other securities, reducing individual risk.
 Professional Management: Fund managers make investment decisions on behalf of
investors, leveraging their expertise to maximize returns.
 Liquidity: Investors can buy and sell mutual fund shares on any business day, offering
liquidity and flexibility.
 Affordability: With relatively low minimum investment requirements, mutual funds are
accessible to a wide range of investors.
Four common mutual fund schemes are:
 Equity Funds: Invest primarily in stocks, aiming for capital appreciation. Examples include
large-cap, mid-cap, and small-cap equity funds.
 Debt Funds: Invest in fixed-income securities like bonds, providing regular income with
lower risk compared to equities. Examples include government bond funds and corporate
bond funds.
 Hybrid Funds: Combine both equity and debt investments to balance risk and return.
Examples include balanced funds and monthly income plans.
 Index Funds: Aim to replicate the performance of a specific market index (e.g., Nifty 50 or
S&P 500) by holding the same securities as the index in the same proportions.

3. Describe the features of money market mutual funds. Money market mutual funds are investment
vehicles that primarily invest in short-term, low-risk, and highly liquid money market instruments,
such as Treasury bills, commercial paper, and certificates of deposit. Key features of money market
mutual funds include:
 Safety: They are considered low-risk investments due to the high credit quality of the
underlying securities.
  Liquidity: Investors can easily redeem their shares at the net asset value (NAV) on any
business day, making them highly liquid.
 Stable NAV: Money market funds aim to maintain a stable NAV (usually $1 per share) to
preserve capital.
 Regular Income: While the primary goal is capital preservation, investors earn regular
income through interest on the underlying securities.
 Low Expenses: Money market funds typically have low expense ratios, which help
maximize returns for investors.

4. What are the roles of the Employees Provident Fund Organization (EPFO)? The Employees
Provident Fund Organization (EPFO) in India plays a crucial role in the management and
administration of provident funds, pension funds, and insurance schemes for employees. Its key roles
include:
 Provident Fund Management: EPFO manages the Employees' Provident Fund (EPF),
which is a social security and retirement benefit scheme for organized sector employees. It
ensures that employees and employers contribute to the fund and that employees receive their
accumulated savings upon retirement, resignation, or other eligible events.
 Pension Fund Management: EPFO administers the Employees' Pension Scheme (EPS),
which provides a pension to employees who are members of the EPF. It manages pension
contributions and disburses pensions to eligible beneficiaries.
 Insurance Schemes: EPFO offers insurance schemes like the Employees' Deposit Linked
Insurance (EDLI) scheme, which provides life insurance coverage to EPF members.
 Providing Financial Security: EPFO's primary goal is to ensure the financial security of
employees in the organized sector by facilitating savings, pensions, and insurance benefits.

5. What is a microfinance institution? State the role of micro-finance in the reduction of poverty?
A microfinance institution (MFI) is a financial institution that provides financial services, such as
small loans, savings accounts, and insurance, to low-income individuals and underserved
communities, often without access to traditional banking services. The role of microfinance in
poverty reduction includes:
 Financial Inclusion: MFIs offer financial services to people who are excluded from the
formal banking sector, enabling them to save, borrow, and invest, thereby increasing their
financial stability.
 Empowering Women: Microfinance often targets women, empowering them to generate
income, improve their living conditions, and contribute to their families' well-being.
 Entrepreneurship: Microfinance supports entrepreneurship and small business development
by providing capital to start or expand small enterprises, creating jobs and income
opportunities.
 Poverty Alleviation: By offering access to credit and savings, microfinance helps individuals
and families cope with emergencies, reduce vulnerability, and break the cycle of poverty.

6. What is SIP? How does it help mutual fund investors? SIP stands for Systematic Investment Plan.
It is a method of investing in mutual funds where an investor contributes a fixed amount of money at
regular intervals (e.g., monthly) rather than making a lump-sum investment. SIP helps mutual fund
investors in several ways:
 Rupee Cost Averaging: SIP allows investors to buy more units when prices are low and
fewer units when prices are high. This strategy reduces the average cost per unit over time.
  Disciplined Investing: SIP encourages regular and disciplined investing, promoting a
savings habit and preventing impulsive decisions.
 Compounding: Over time, the returns on investments made through SIP can compound,
leading to substantial wealth creation.
 Reduced Timing Risk: SIP removes the need for trying to time the market, as investments
are made consistently, regardless of market fluctuations.

7. Briefly discuss the composition of NBFCs in India and explain the role of housing finance
companies. NBFCs in India can be categorized based on their primary activities, which include:
 Asset Finance Company (AFC): These NBFCs primarily finance the purchase of physical
assets like machinery, equipment, and vehicles.
 Investment Company (IC): ICs invest in securities, such as stocks and bonds, and provide
loans to businesses.
 Loan Company (LC): LCs provide loans and advances, including personal loans, consumer
loans, and advances.
 Infrastructure Finance Company (IFC): IFCs focus on financing infrastructure projects
like roads, power, and telecommunications.
 Housing Finance Company (HFC): HFCs specialize in providing loans for the purchase,
construction, or renovation of residential properties. They play a crucial role in making
homeownership more accessible.
Housing finance companies contribute to the development of the economy by facilitating affordable
housing, which, in turn, promotes construction and allied industries. This can create employment
opportunities and stimulate economic growth. Additionally, increased homeownership improves living
conditions and enhances the overall standard of living.

8. Define money market mutual funds and state the recent changes in the mutual funds industry
in India. Money market mutual funds are investment funds that primarily invest in short-term, low-
risk, and highly liquid money market instruments. Recent changes in the mutual funds industry in
India as of my last knowledge update in January 2022 included:
 Revised Categorization: The Securities and Exchange Board of India (SEBI) had introduced
new regulations for mutual fund categorization and rationalization to make it easier for
investors to choose funds with specific investment objectives.
 Reduction in Total Expense Ratio (TER): SEBI had mandated a reduction in TER, making
mutual fund investments more cost-effective for investors.
 Standardization of Risk-O-Meter: SEBI introduced a standardized risk-o-meter for mutual
funds to help investors assess the risk associated with a particular fund.
 Side Pocketing: This mechanism allows fund managers to segregate illiquid or distressed
assets from the main portfolio, preventing a contagion effect on the rest of the investors.
Please verify with the latest sources for any changes or updates after January 2022.

9. What are the various pension funds operating in India? Briefly discuss the function of any one
of them. In India, there are several pension funds operating, including the Employees' Provident
Fund Organization (EPFO), the National Pension System (NPS), and the Atal Pension Yojana
(APY). Let's briefly discuss the National Pension System (NPS):
 National Pension System (NPS): NPS is a government-sponsored voluntary, long-term
retirement savings scheme. It allows individuals to contribute regularly during their working
years and build a retirement corpus. NPS offers two types of accounts: Tier-I and Tier-II.
  Function of NPS: NPS provides a structured way for individuals to accumulate savings for
retirement. It allows for contributions to be invested in various asset classes, including
equities, government bonds, and corporate debt. The fund's performance can impact the
retirement corpus. Upon retirement, individuals can choose to receive a lump sum amount or
a regular pension. NPS encourages financial discipline and long-term savings, reducing the
burden on the government to provide for retirement income.

10. What do you mean by non-banking finance companies? How are they different from banking
companies? What role do they play in the development of an economy? Non-banking finance
companies (NBFCs) are financial institutions that offer various banking services, such as loans,
investments, and wealth management, but do not hold a banking license. They differ from banking
companies in the following ways:
 Regulation: NBFCs are subject to less stringent regulation compared to banks.
 Acceptance of Demand Deposits: NBFCs cannot accept demand deposits from the public.
 Access to Central Bank Facilities: Unlike banks, NBFCs do not have access to central bank
facilities.
 Credit Creation: Banks can create credit through the lending process, while NBFCs
primarily lend from the funds they have raised from various sources.
NBFCs play a crucial role in the development of an economy by increasing financial inclusion, supporting
small and medium-sized enterprises (SMEs), providing credit to underserved populations, and
supplementing the role of traditional banks in promoting economic growth.

11. "Investing in securities through mutual funds is a better choice than direct investment." In the
light of the statement, discuss the benefits derived by the investors investing in mutual funds.
Investing in securities through mutual funds offers several advantages over direct investment:
 Diversification: Mutual funds pool investments from various investors and spread the money
across a diversified portfolio of securities, reducing individual risk.
 Professional Management: Experienced fund managers make investment decisions, aiming
to maximize returns and manage risk effectively.
 Liquidity: Mutual fund units can be bought and sold easily, providing liquidity and
flexibility to investors.
 Affordability: Mutual funds allow investors to participate in various markets and asset
classes with relatively low minimum investment amounts.
 Cost-Efficiency: Mutual funds can benefit from economies of scale, potentially leading to
lower transaction costs and management fees for investors.
 Risk Management: Fund managers conduct in-depth research and analysis to make
informed investment decisions, helping investors navigate volatile markets.
In summary, mutual funds offer professional management, diversification, liquidity, and accessibility,
making them a preferable choice for many investors.

12. What is a pension fund? What are its functions? A pension fund is a pool of funds set aside to
provide income for individuals during their retirement years. Pension funds have several functions:
 Accumulation of Savings: Pension funds collect regular contributions from employees and
employers during an individual's working years, creating a retirement corpus.
 Investment Management: Pension funds invest the accumulated funds in various asset
classes, aiming to grow the assets over time. These assets may include stocks, bonds, real
estate, and other investments.
  Risk Management: Fund managers aim to balance risk and return, ensuring that the pension
fund can meet its future obligations to retirees.
 Payment of Benefits: When individuals retire, pension funds provide regular payments
(pensions) to help maintain their financial well-being in retirement.
 Long-Term Financial Security: Pension funds play a crucial role in providing financial
security to retirees, reducing the reliance on social security systems and enabling individuals
to enjoy a comfortable retirement.

13. Discuss the functions of NBFCs. Non-banking financial companies (NBFCs) perform various
functions in the financial sector:
 Provision of Credit: NBFCs offer loans and credit facilities to individuals, businesses, and
various sectors of the economy, often focusing on underserved or niche markets.
 Mobilization of Savings: They collect funds from the public through various instruments
like fixed deposits, recurring deposits, and debentures, which they use for lending and
investment.
 Investment Services: Some NBFCs provide services related to investments, such as portfolio
management, wealth management, and financial advisory.
 Leasing and Hire Purchase: NBFCs engage in leasing and hire-purchase activities, allowing
businesses and individuals to acquire assets with flexible payment options.
 Money Market Operations: Some NBFCs participate in the money market, trading in short-
term financial instruments like commercial paper and certificates of deposit.
 Wealth Management: NBFCs may offer wealth management services, helping clients
manage and grow their wealth through investments and financial planning.
 Housing Finance: Housing finance NBFCs specialize in providing loans for the purchase,
construction, or renovation of residential properties.
 Microfinance: Some NBFCs focus on

14. What is the role played by pension funds in the development of an economy?
Pension funds play a crucial role in the development of an economy in the following ways:
 Capital Accumulation: Pension funds pool money from contributors, invest it in various financial
instruments, and allow it to grow over time. This capital accumulation leads to increased investments
in the economy, fostering economic growth.
 Long-Term Investment: Pension funds typically have a long-term investment horizon. By directing
funds into long-term assets like stocks and bonds, they contribute to stable and sustained economic
development.
 Capital Market Development: Pension funds are significant players in the capital markets. Their
investments help deepen and broaden these markets, improving liquidity and facilitating efficient
allocation of resources.
 Reducing Dependence on Government: Pension funds can reduce the burden on the government to
provide social security and pensions. This allows governments to allocate resources to other critical
areas of the economy.
 Enhancing Savings Culture: By encouraging individuals to save for retirement, pension funds
promote a savings culture, which, in turn, can be channeled into productive investments.

15. What are the benefits of investing in mutual funds? Explain any four mutual fund schemes.
Benefits of investing in mutual funds:
  Diversification: Mutual funds pool money from various investors and invest it in a diversified
portfolio of assets, reducing individual risk. This diversification helps spread risk across different
securities.
 Professional Management: Mutual funds are managed by professional fund managers who make
investment decisions based on research and expertise, potentially leading to better returns.
 Liquidity: Mutual fund units are generally more liquid than direct investments in individual stocks
or bonds. Investors can buy or sell units at the Net Asset Value (NAV) on any business day.
 Affordability: Mutual funds allow investors to participate in a diversified portfolio with a relatively
small investment. This makes them accessible to a wide range of investors.
Four common mutual fund schemes:
 Equity Funds: These funds primarily invest in stocks. They offer the potential for high returns but
come with higher risk due to market volatility.
 Debt Funds: Debt funds invest in fixed-income securities like bonds and government securities.
They are typically lower risk compared to equity funds and provide regular income.
 Balanced Funds: Also known as hybrid funds, these invest in a mix of stocks and bonds, offering a
balance between growth and income. They suit investors seeking a moderate risk-return profile.
 Index Funds: These funds replicate the performance of a specific stock market index, such as the
S&P 500. They provide diversification and low expense ratios.
Investors should choose mutual fund schemes that align with their financial goals, risk tolerance, and
investment horizon.