Financial Markets and Instruments

SEBI regulations permit mutual funds to borrow up to 20% of their net assets for temporary liquidity needs. This borrowing cannot be used for investment purposes and is subject to time restrictions. Option A is incorrect because funds CAN borrow within limits. Option C is wrong because the period isn't strictly limited to one year. Option D violates regulations - borrowing is not permitted for investment.

Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.

Mutual funds in India must value their investments on a mark-to-market basis as per SEBI regulations. This means investments are valued at their current market price rather than purchase price or book value. Mark-to-market valuation ensures that the NAV reflects the true current value of the fund's holdings. Purchase price and book value do not account for market fluctuations.

As per SEBI regulations, mutual funds in India must use the average cost method to calculate profits and losses on securities. FIFO and LIFO methods are not permitted for mutual fund accounting. The average cost method provides a fair and consistent way to track the cost basis of investments bought at different times. This method prevents manipulation of realized gains through selective identification of shares sold.

Mutual funds in India must value their investments on a mark-to-market basis as per SEBI regulations. This means investments are valued at their current market price rather than purchase price or book value. Mark-to-market valuation ensures that the NAV reflects the true current value of the fund's holdings. Purchase price and book value do not account for market fluctuations.

Mutual fund dividends can ONLY be paid out of realized profits, not unrealized profits. This is a key SEBI requirement to ensure dividends are backed by actual gains. Dividends are tax-free in investors' hands (both equity and debt). Equity mutual funds don't pay dividend distribution tax, but debt funds do. Option C is the statement that is NOT true because dividends cannot come from unrealized profits.

Under SEBI Mutual Fund Regulations 1996, an asset is classified as NPA if interest or installment remains overdue for one quarter (approximately 90 days). This aligns with RBI norms for NPAs. Options A and B describe specific instances but don't define the general rule. Option C mentions 180 days which is not the correct period. The one-quarter standard is widely followed in Indian financial regulations.

Systematic Withdrawal Plan (SWP) is designed to provide regular income to investors by allowing them to withdraw a fixed amount at predetermined intervals. This is essentially the reverse of Systematic Investment Plan (SIP), making it suitable for investors seeking regular cash flow from their investments.

Automatic reinvestment plans typically do NOT charge load fees on reinvested distributions. Most mutual funds allow reinvestment of dividends and capital gains without additional load charges, which is precisely why the compounding benefit is not lost. The statement claiming heavy load charges on reinvestment is therefore false.

Systematic Transfer Plan (STP) allows investors to transfer money from one scheme to another, often from a debt fund to an equity fund. This effectively creates a systematic investment in the target scheme, providing similar benefits to SIP. The other options are incorrect: SIP does provide rupee cost averaging, and SIP does not provide market timing guidance.

Load charges on switching between schemes within the same mutual fund depend on the AMC's specific policies. Some AMCs charge exit load from the source scheme, others may charge entry load in the target scheme, and some offer load-free internal switches. There is no universal rule that applies across all mutual funds.

Systematic Investment Plans offer all three advantages: they allow starting investments with small amounts (Rs. 500-1000), help investors develop disciplined investing habits, and provide rupee cost averaging benefits by buying more units when prices are low and fewer when prices are high.

An agent needs product knowledge, client risk assessment, and after-sales service to sell funds ethically and effectively. Offering large rebates to attract investments is not required - in fact, SEBI regulates rebates to prevent mis-selling. Good sales practices rely on advice and service, not financial incentives.

When a mutual fund invests money on behalf of investors, those investments become assets of the fund - stocks, bonds, cash, etc. They are not liabilities (owed to others) nor capital (the investors' money). The fund owns these assets, which are held in trust for unit holders.