Financial Markets and Instruments

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money, collected from the investors, in securities market. Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme (from this all expenses are subtracted) divided by the total number of units of the scheme on any particular date.

Operational risk for foreign exchange in particular involves problems with processing, product pricing and valuation. These problems can result from a variety of causes, including natural disasters, which can cause the loss of a primary trading site or a change in the financial details of the trade or settlement instructions on FX transactions.

Under the cash budget method, monthly cash inflow and outflow statements are prepared and the highest gap between the two becomes the basis of sanction of credit limit. Banks make use of cash budget method in case of: (a) Seasonal industries (b) Software development (c) Film production (d) Service sector activities, including construction activities

9.00%

3

Capital funds are broadly classified as Tier I and Tier II capital. Elements of Tier II capital will be reckoned as capital funds up to a maximum of 100% of Tier I capital, after making the deductions/adjustments. In other words, Tier II capital cannot exceed Tier I capital.

Open-ended fund is a collective investment scheme which can issue and redeem shares at any time. An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period.

The second pillar, i.e. Supervisory Review Process, is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. Banks can review their risk management system.

Correct Answer: 20%, paid up capital Equity investments in any non-financial services company held by (a) a bank; (b) entities which are bank’s subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank; and (c) mutual funds managed by Asset Management Companies (AMCs) controlled by the bank should in the aggregate not exceed 20 per cent of the investee company’s paid up share capital.

Tier II capital includes Revaluation reserves, Undisclosed reserves, Perpetual cumulative preference shares, Subordinated term debt and General provisions etc. Thus, option 2 is the correct answer.

Gilt fund is a mutual fund that invests in several different types of medium and long-term Govt. securities in addition to top quality corporate debt. Gilts originated in Britain.

A mutual fund is a mechanism for pooling resources by issuing units to the investors and investing funds in securities, in accordance with objectives as disclosed in the offer document. Mutual fund units are issued to the investors in accordance with a quantum of money invested by them. Investors of mutual funds are known as unit holders.

Market risk is the risk of losses in positions arising from movements in market prices.There is no unique classification as each classification may refer to different aspects of market risk like equity risk, commodity price risk, currency risk, liquidity risk and interest risk, etc. However, loan default risk is the chance that companies or individuals will be unable to pay the required payments on their debt obligations. Thus, option 3 is the correct answer.

It has been prescribed that the plan of realisation of assets shall not exceed five years from the date of acquisition of asset. Thus, option 4 gives the wrong information.

Mutual funds offer diverse investment schemes: open-ended (can buy/sell anytime), close-ended (fixed maturity), and growth-oriented (capital appreciation). This variety allows investors to choose based on liquidity needs and investment horizon. All these types coexist in the mutual fund industry.