Answer 1

Mutual Funds is a type of investment in which, the mutual fund company collect money
from its investors and invest in various equities, bonds, government securities, gold etc.
Companies which are registered to carry out business of mutual fund are called also called as
fund houses. Mutual fund companies have different types of Mutual Funds from which the
investors can select any type of mutual fund depending upon their risk appetite. Fund houses
pool money from investors and invest on their behalf in various instruments in the financial
market. Mutual funds assign fund managers to manage various funds. These fund managers
are responsible for managing the funds, analyzing various designated investment option and
take calculated risks after doing thorough financial analysis. The main responsibility of the
fund manager is to decide where to invest, at what to time, for how much period to invest and
when to exit the investment. As RBI is the regulatory institution for banks, same way
government has formed SEBI (Securities and Exchange Board of India) for regulating mutual
fund houses. Investment in mutual funds can be done in two ways I.e in Lumpsum and in the
form of SIP. In lumpsum investment, the amount is invested at one go while in SIP, every
month a fixed amount is invested.
The following are some types of mutual funds:
(A)Based on Structure
- Open Ended Funds: These type of mutual funds are highly liquid in nature. They allow its
investors to invest and redeem at any time. They do not have specific investment period, the
investors can invest and withdraw any time as per their wish.
- Closed Ended Funds: these type of mutual funds have a fixed monthly date. The investors
can invest only during the new fund offer and withdrawal can be done only upon maturity.
Units cannot be purchased and redeemed any time.
(B)Mutual funds based on asset classification
- Equity Mutual Fund: In these type of mutual funds, majority of the investment i.e more than
65% of the investment is done in stocks of companies listed in the stock exchange. These
type of mutual funds are ideal for long term investors as the stocks are volatile in nature.
These are high risk high rewarding funds. It is suitable for investors with good amount of risk
appetite.
-Debt Mutual Fund: In these type of mutual funds the most of the investment is done in debt
securities with fixed returns like government securities, corporate bonds and other debt
instruments. Unlike equity, they are non-volatile in nature. They offer stable returns to the
investors. However, their returns are lower compared to equity mutual funds. They are
differentiated on the basis of maturity period of the securities in which investment is done.
-Hybrid Mutual Funds: In these type of mutual funds, the investment is done in both equity
and debt in different proportions as decided by the fund house. Investment allocation in
hybrid fund is done as per the purpose decided by the fund house. Funds offering higher
returns will have major investment done in equity and lesser investment done in debt.
Whereas funds offering higher amount of stability will have major investment in debt and
lesser investment in equity, thereby offering steady returns to its investors.
Investment in mutual funds can be done keeping view the following advantages:
-Diversification: As mutual fund does investment in various instruments i.e high, moderate
and low risk instruments, it provides diversification of investment to the investors. When we
directly invest in stocks we can diversify our portfolio only upto certain extent. However
mutual fund offer wide range of diversification.
-Professional Management- Mutual funds are managed by professional, who are highly
qualified and knowledgeable. They use their expertise to invest in equities and debt
instruments. The take calculated risk and invest according only after doing thorough financial
analysis of the company’s balance sheet. They take timely decisions of entry and exit from
the stock in order to safeguard profit and minimize loss.
-Transparency: When we do investment in any fund, we can see where exactly the fund house
invest its funds. They keep fund allocation information open to everyone, so investor can see
in which stocks his money money will be invested and in what proportion. This information
is not as per individual investment but total investment done by the fund house for that
particular fund. So investor can do thorough research before choosing any fund.
-Tax Saving: Investment ELSS mutual fund can provide tax expention upto Rs. 150000/-
under section 80C of income tax. Under ELSS mutual fund lock-in period is 3 years unlike
invest investment in Tax saving FD offered by bank which has lock-in period of 5 years. Also
the return in FD tax saving fund is fixed, whereas return in ELSS mutual fund is not fixed
and depends upon the performance of portfolio of the fund.
-Returns on Investment: Mutual fund offer higher return on investment compared to bank’s
Fixed deposit, PPF(Public provident fund) etc. Most of the mutual funds have history of
offering minimum return on investment within the range of 8-10 % depending upon the
performance of the portfolio of the fund. They also have the potential of offering higher
returns even beyond 15%. However the returns are subject to market risk.
Mutual fund offers investors a reliable and expertised investment plan. Even though Mutual
funds can be volatile in nature, they offer better investment returns compared to traditional
investment options. If we stay invested for a longer period of time, there are possibilities of
getting better returns. They have potential to offer higher returns, income generation, capital
growth if a person is ready to take calculated risk as per his risk appetite.
Answer 2
Liquidity management in bank refers to the bank’s ability to meet its financial obligation
as they become due. Bank maintains its liquidity through direct cash holding in accounts with
its Central bank (RBI). It can be referred to as Statutory liquidity ratio (SLR). Even though
RBI has set fixed minimum amount to be kept in the form of cash through SLR, each bank
can decide how much amount can be kept in cash form over and above SLR. Other way bank
can maintain its liquidity is through investment in government bonds and securities that can
be easily withdrawn when in need. Each bank is required to keep financial discipline as it
helps to be prepared for potential business risk and make quick decision as and when
required. When a bank has clear view of its liquidity it can easily deal with unexpected
business risk that might arise anytime in future. Poor liquidity management of bank can have
domino effect on other institutions as well as on its investors.
The following are some of the reason why liquidity management in bank is important in
bank.
1. Improving control over cash forecasting: Good liquidity management helps to keep a tab
on the liquidity position of the bank. It helps to be in readiness for any uncertain event that
may happen in future. It allows banks to predict future liquidity position accurately and also
control over cash forecasting. When the liquidity is precisely forecasted, it reduces the risk of
any other unpredicted cost that might occur in future and reduce the liquidity ratio. Future
risk can be mitigated by maintaining sound liquidity ratio.
2. Unlocking trapped cash: another problem arises in liquidity management when the bank is
not pro-active in collecting its receivable on time and following up for the same when it falls
due. Receivable include loan repayments, investment profits, collection of invoice payment
made by debiting bank’s P&L account and any other source of income. Bank should have
sound approach towards receivables management. The ability of bank to be able to pay it’s
debtors comes with receivable management. This prevents the risk of unexpected imbalance
between inflows and outflows. When the bank is not able to unlock its trapped cash it can
lead to, using its capital to meet contingent liability and buffer cost.
3. Mitigating liquidity Risk: Bank’s current liquidity assessment and forecasting determine
the bank’s ability to meets financial obligations without causing loss. If the bank fails to
maintain its liquidity then they might have to sell its assets at distress value which lead to loss
for the bank. As the bank will be in urgent need to pay its debtors, they will not have enough
time to find suitable buyer at a good price for its assets, thereby leading to losses. Solid
liquidity management should also helps in covering for unexpected contingencies and any
kind of loss due to operational errors. Comprehensive liquidity risk management mitigates
the risk of insolvency of the bank.
4. Improving Bank’s Image: when the bank is able to smoothly manage it’s liquidity and
maintaining a sound balance between its’ debtors and creditor’s, this reflects in the balance of
the bank. When the bank’s liquidity management data is strong, investors are more likely to
give preference to such banks. Also it improves bank’s image in the eyes of its stake holders,
regulators, customers etc. Bank’s financial health is determined by its liquidity management
and thereby improving bank’s overall image.
The following types of money market instruments are can be used by banks to earn
profit/interest by investing for short period of time.
i.Treasury bill: These are short term money market instruments issued by government of
India. These bills do not pay any interest but are issued at discounted value and redeemed
upon maturity at a nominal value. They are zero coupon securities that offer returns through
prices difference. Treasury bill are based on maturity and type. Treasury bills have maturity
of three tenures i.e 91 days, 182 days and 364 days. Treasury bills offer risk free return to its
investors. They issued by Government generally during economic boom inorder to control
inflation. For eg. Treasury bill of Rs. 150 will be issued at discounted price of Rs. 145 and
they can be redeemed upon maturity at Rs. 150, thereby providing profit of Rs.5 on each bill.
ii. Commercial Paper: Commercial Paper is a money-market security issued by large banks
and corporations. It is used by banks and large corporation to raise funds inorder to meet their
short term obligations. Commercial paper is a kind of promissory note issued by bank to pay
back after a certain period of time on its maturity date. These papers are not backed by any
other type of security, thus they can be issued by institution with good credit rating.
Commercial papers are issued at discount from its face value for shorter repayment date. The
longer the maturity period, the higher is the interest rate, however the interest rate fluctuates
with market conditions.
iii. Government securities (G-sec): Government securities are issued by government
inorder to raise fund from public to meet fiscal deficit. The securities are issued by RBI on
behalf of the government. Government securities are risk free bonds, as it is issued by
government. Government Securities are issued and redeemed at face value. They offer fixed
tenor and interest rate to investors, decided at the time of issuance. It’s maturity ranges from
of 2-30 years.
Liquidity management is very important for any business to function properly and avoid
mismatch of its cash flow. When the bank manages is liquidity properly, the banks secures
itself from facing any inconveniences that might occur in case of unwarned situation.
Managing liquidity helps maintaining the image of the bank and also adds to it’s credibility.
When a bank is strong enough to face tough economic situations, the investors are easily
attracted to such banks.
Answer 3a
Floating a company simply means the company is selling it’s shares to public inorder to
attract investors. When a company is formed, it’s shares are held by limited no of people,
however when the company is floated in the secondary market, the company sells some of
it’s shares in secondary market i.e the shares are sold to the public in order to pool investment
from the public. Secondary market refer to trading of shares which have already been issued.
The process of floating a company in the secondary market is as follows:
-Selecting a broker: Trading in secondary market can be done through authorized brokers.
These can be individual brokers, companies etc. In order to trade in stock market one has to
first select broker for the same.
-Opening of Demat Account: Once broker is selected, demat account is to be opened with the
the broker. This demat accont is also inclusive of trading account. The shares tahht have been
bought is collected in this demat account. Demat simply means “Dematerialised”. The shares
bought can be sold through this demat account only.
-Placing an order: Placing an order refers to placing and order for buying shares at the desired
price. Order can be place of two types i.e Market price and limited pric. Market price refers to
shares can be bought at the current market price, while limited price refers to shares will be
bought at the desired price only.
-Execution of order: Once an order is place, if limited price is selected then as soon as the
share price reached that level order is executed. Whereas in case of market price, the order
gets executed immediately at the market price. Once order is executed the broker informs
about the date, time and amount details of the order.
-Settlement: This step involves the actual transfer of securities between the buyer and seller.
This is carried out by the broker. There are two main types of settlement, on the spot
settlement, where the funds are immediately transferred and exchanges on the second
working day of the transaction, and forward settlement, refers to transfer of exchange some
time in the future.
The above procedure can be followed for spreading investment in various companies in the
secondary market.

Answer 3b
State intervention in economy refers to rules and regulation imposed by the government for
monitoring of the economy. The government intervention helps in correcting economic flaws
and inequality. Demand and supply are not enough to single handedly ensure economic
equilibrium. Thus government makes rules and regulation to ensure that everyone is
benefited in the economy. The following are some of the benefits of state intervention in the
economy
-Equality: In free market there is possibility of inequality and poverty. When the economy is
not regulated, there are possibility of poor being exploited at the hands of the rich. In free
economy, the powers rest in the hands of the wealthy and poor people have to suffer or are
always at their mercy. For eg. Government has reserved seats in government department for
people from back ward class. These seats are reserved exclusively for the people belonging to
backward tribe i.e only backward tribe people will be hired for those positions. This ensures
that they are not left behind and develop as the country develops. The same is done in case of
education.
- Public goods: Public good includes law and order. When there is government intervention
in the economy law and order is maintained. The government imposes tax on businesses and
individuals so that the money can be used for public welfare, like public infrastructure,
education, health and safety etc. The government provides benefit of not paying tax for
people who belong to lower income category and imposes tax as per income earned by the
business or individual. For eg as per Indian income tax act, individual earning income below
7 lakhs is exempted from paying tax.
- Shift of consumer behavior: There are certain demerit goods being sold in the economy like
alcohol, tobacco etc. If the government notices that sale these goods are being sold in the
market is increasing beyond then the government will take certain measures like imposing
higher tax on such goods, advertisement campaign, or even put a ban to protect public health.
In Feb 2024, State government of Karnataka had passed a bill to put a ban on sale of Hukka
across the state.
-Monopoly power: In a free market, firms with monopoly business can have the power to
charge higher prices for the good sold by them. They can also exploit their workers by paying
lower wages. The government intervenes regularly to check such problems and changes its
policy from time to time to ensure power and money is not concentrated with only a certain
class of people. Government can limit mergers if required and break monopoly to increase
economic welfare.
-Strategic planning on infrastructure: Government regularly builds and update its transport
system as per requirement of the economy. Infrastructure and transport is one of the
important aspects of booming economy. With sound transport system goods can be
transported freely. Post-independence India has developed its roads, railways, highways to
connect the states and make movement of goods people easy.
This way the government created rules and regulation to ensure the economy is not
dominated by people with money and power. Government intervention helps in uplifting the
society whereas in free market there is minimum control over the business.