Money and Capital Market: SEBI, bonds and funds

The NAV is the per-unit value of a scheme's portfolio. The fund house values all its holdings at market value (with accrued income), deducts liabilities and expenses, and divides the result by the number of units outstanding. For open-ended schemes the NAV is declared every business day, and investors buy or redeem units at it, subject to any exit load. It is not the historical cost of investment, nor the face value, and it is not set by exchange trading; an ETF's market price on the exchange can differ slightly from its NAV.

An ETF is a mutual fund scheme, usually tracking an index such as the Nifty 50 or a commodity such as gold, whose units are listed on a stock exchange. Investors buy and sell them through brokers during trading hours at prices set by the market, which stay close to the scheme's value through the action of authorised market makers. In an ordinary open-ended scheme, investors buy and redeem units with the fund house itself at the day's NAV. ETFs carry market risk and give no guaranteed return, and they can hold equity, debt or gold depending on the scheme.

All three statements are correct. REITs pool investors' money to own income- producing real estate such as office parks and malls; they are trusts registered with SEBI under the REIT Regulations, 2014, and India's first REIT listed in 2019. To keep them low-risk and income-focused, at least 80 per cent of asset value must be in completed, revenue- generating properties, with limited room for under-construction assets. The REIT (Amendment) Regulations of 8 March 2024 created Small and Medium REITs (SM REITs) for assets of ₹50 crore to less than ₹500 crore, bringing fractional ownership platforms under regulation.

Statements 1 and 3 are correct. Under the SEBI (Mutual Funds) Regulations, 1996, a mutual fund is set up as a trust: the sponsor creates it, the trustees hold the assets for unitholders, an asset management company manages the money and a custodian keeps the securities. Because investors cannot redeem close-ended units with the fund before maturity, the Regulations require such schemes (other than ELSS) to be listed so that investors can exit on the exchange. Statement 2 is wrong: SEBI regulates mutual funds; AMFI is the industry association, which runs investor-awareness work and the registration of distributors, but has no statutory regulatory power.

Both statements are correct and Statement-II explains Statement-I. A REIT owns completed, rent-earning properties, and the REIT Regulations, 2014 require it to pass on at least 90 per cent of its net distributable cash flows to unitholders at regular intervals. Because most of the rental income is paid out, unitholders earn a steady distribution yield (as interest, dividend or repayment of debt) in addition to any change in the unit price. InvITs work under a similar 90 per cent rule. This high pay-out is what makes REITs resemble income products such as bonds.

Only two of them are SEBI labels. SEBI's circular of 5 October 2020 on product labelling introduced a six-level Risk-o-meter, effective 1 January 2021: Low, Low to Moderate, Moderate, Moderately High, High and Very High. Each scheme's risk is computed from its portfolio, reviewed every month and disclosed to investors, so that a scheme's label can change if its holdings change. 'Moderately Low' and 'Extreme' are not part of the scale; the top level is 'Very High', added in 2020 above the earlier five levels.

Statements 1 and 2 are correct. To make schemes comparable, SEBI's categorisation circular of 6 October 2017 defined large-cap companies as the top 100 by full market capitalisation, mid-cap as the 101st to 250th, and small-cap as the 251st onwards, with the list updated by AMFI every six months. It also allowed only one scheme per category for each fund house, with a few exceptions. Statement 3 is wrong: an ELSS must invest at least 80 per cent in equity and carries a three-year lock-in, the shortest among tax-saving investments; the five-year lock-in belongs to tax-saving bank fixed deposits.

Statements 1 and 2 are correct. Money market instruments such as CP and CDs come under the RBI's directions issued under Section 45W of the RBI Act. The issue and listing of corporate bonds (non-convertible securities) is governed by SEBI under its Non-Convertible Securities Regulations, 2021, and trading in them takes place on stock exchanges. Statement 3 is wrong: collective investment schemes are regulated by SEBI under Section 11AA of the SEBI Act and the CIS Regulations, 1999, which is why SEBI acted against schemes such as those of PACL and Saradha-linked entities.

Two of them belong to the capital market (b). The capital market deals in long-term funds, over one year. It includes the stock market (item 4), where shares are traded, and the government bond market (item 1), where long-dated bonds are bought and sold. The money market deals in funds for up to one year. Item 2 is wrong: call money is borrowing between banks for one day, up to 14 days for notice money. Item 3 is wrong: Treasury Bills are short-term government papers of 91, 182 and 364 days.

Notice the regulators: SEBI watches the capital market, while the RBI looks after the money market and government securities. Commercial paper and certificates of deposit are other money market tools.

Answer as per the official UPSC answer key.

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