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Explain the two types of Mutual Funds.
Ans: Two types of Mutual funds are:
Open Ended Funds: These funds have no fixed corpus and period. Investors are free to buy from, or sell to, the trust any number of units at any point of time at prices which are linked to the net asset value (NAV) of the units.
Close Ended Funds: Subscriptions from the investors are collected during a specified time period and have a fixed corpus. Not only that, the investors cannot redeem their units till the specified maturity date.
Explain, in brief, any four features of Mutual funds.
Ans: Four features of mutual funds are as follows:
It is a trust into which a number of investors invest their money in the form of units to form a large pool of funds.
The amount is invested in securities by the managers of the fund.
The amount is invested in different securities of reputed companies to ensure definite and regular income. Thus, it helps in minimizing the risk.
The mutual fund schemes often have the advantages of high return, easy liquidity,safety and tax benefits to the investors.
Mention the merits and demerits of ‘Retained Earnings’ as a source of long-term finance.
Merits :
(a) The retained profits can be used for expansion and modernization programs by the companies.
(b) It also strengthens the firm’s equity base, which enables to borrow at better
terms and conditions.
Demerits :
(a) it is fully dependent on the accuracy of profits; and
(b) possibility of reckless use of funds by the management.
What is meant by the Stock Market?
The secondary market (stock exchange) is an association or organisation or a body of individuals established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities.
It may be noted that it is called a secondary market because only the securities already issued can be traded on the floor of the stock exchange.
This market is open only to its members, most of whom are brokers acting as agents of the buyers and sellers of securities.
Name any two special financial institutions.
Ans: Two special financial institutions are:
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Development Bank of India (IDBI)
Explain ‘Capital Market’ as a source of long-term finance.
Capital market refers to the organization and the mechanism through which the companies, other institutions, and the government raise long-term funds.
It constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets, and raising of capital by issuing various securities such as shares, debentures, bonds, etc.
For the trading of securities, there are two different segments in the capital market i.e.primary market and secondary market.
The primary market deals with new/fresh issue of securities and is, therefore, known as the new issue market.
The secondary market provides a place for the purchase and sale of existing securities and is known as the stock market or stock exchange.
Mention any two features of Mutual Funds.
Ans:The essential features of mutual funds are as follows:
1. It is a trust into which a number of investors invest their money in the form of units to form a large pool of funds.
2. The amount is invested in securities by the managers of the fund.
State the meaning of ‘Foreign Direct Investment’.
Ans: The foreign direct investment usually refers to the subscription by the foreigners to shares and debentures of the Indian Companies.
Alternatively, some companies are formed with the specified purpose of operating in India or the multinationals can set up their subsidiary or branch in India.
As for the foreign collaborations, these can be financial collaborations involving foreign companies’ participation in the equity capital of an existing or new undertaking.
Name any three special financial institutions and state their objectives.
1. Industrial Finance Corporation of India (IFCI) : It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities.
2. Industrial Credit and Investment Corporation of India (ICICI): It was set up in 1955 for providing long-term loans to companies for a period up to 15 years and subscribes to their shares and debentures.
3.Industrial Development Bank of India (IDBI): It was set up in 1964 as a subsidiary of the Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the number of funds.
4. Industrial Investment Bank of India (IIBI): The former Industrial Reconstruction Bank of India (IRBI), an institution which was set up for rehabilitation of small units have been reconstituted in 1997 as Industrial Investment Bank of India. It is a full-fledged all-purpose development bank with adequate operational flexibility and autonomy.
State any two functions of EXIM bank.
Ans: The main functions of the Export and Import Bank of India are:
(i) financing of export and import of goods and services;
(ii) granting deferred payment credit for medium and long term duration;
What are the main functions of special financial institution?
Ans: The main functions of special financial institutions are:
To grant loans for a longer period to the industrial establishment;
To help the establishment of business units that require a large amount of funds and have long gestation period;
To provide support for the speedy development of the economy in general and backward regions in particular;
To offer specialized services operating in the areas of promotion, project assistance, technical assistance services, and training and development of entrepreneurs and
To provide technical and professional management services and help in the identification, evaluation, and execution of new projects.
Describe the role of venture capital institutions in providing long term finance to business.
Ans: Venture Capital is a form of equity finance designed especially for funding high risk and high reward projects of young entrepreneurs.
The Role of venture capital are as follows:
1. It helps them to turn their research and development projects into commercial ventures by providing them the initial capital and managerial assistance.
2.The initial capital is provided in the form of equity participation through the direct purchase of the shares and debentures of the enterprise set up for the purpose.
3. The institutions providing venture capital also actively participate in the management of the entrepreneurs’ business. By actively involving and supporting the enterprises, they are able to protect and enhance the value of their investment.
Explain how LIC of India provides support to business sectors in solving long-term requirements of funds.
Ans:
Primarily it carries on the business of life insurance and deploys the funds in accordance with national priorities and objectives. It invests mainly in government securities and shares, debentures, and bonds of companies.
It also extends financial assistance to banks and other institutions for social development and infrastructure facilities.
It also underwrites new issues of shares and grant loans to the corporate sectors.
Its performance with regard to assistance to the corporate sector has been significant both in terms of sanctions(approval) and disbursements(distribution)
Explain the role of NBFCs in providing long-term finance.
Non-Banking Financial Companies perform the twin functions of accepting deposits from the public and providing loans.
However, they are not regarded as banking companies as they do not carry on the normal banking activities.
They raise funds from the public by offering an attractive rate of interest and give loans mainly to wholesale and retail traders, small-scale industries, and self-employed persons.
The loans granted by these finance companies are generally unsecured and the interest charged by them ranges between 24 to 36 percent per annum.
Besides giving loans and advances, the NBFCs also have purchase and discount hundis, undertaken merchant banking, housing finance, lease financing, hire purchase business, etc.
Describe ‘External borrowings’ as a form of getting funds from foreign sources.
External Borrowings include loans obtained at concessional rates of interest with a long maturity period and commercial borrowings.
The major sources of concessional loans have been the International Monetary Fund (IMF), Aid India Consortium (AIC), Asian Development Bank (ADB), World Bank (International Bank for Reconstruction and Development), and International Financial Corporation.
The World Bank grants loans for specific industrial projects of high priority and given either directly to an industrial concern or through a government agency.
The International Finance Corporation, an affiliate of the World Bank, grants loans to industrial units for a period of 8 to 10 years. Such loans do not require a government guarantee.
The external commercial borrowings are permitted by the government as an important source of finance for Indian firms for expansion investments