is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds etc.

Q. Which set of keywords given below most closely captures the arguments of the passage?

The Indian financial sector has undergone tremendous changes in the last two decades. A lot of reforms have been undertaken in the sector that have led to proliferation of financial products, activities and organizational forms that have improved and increased the efficiency of the financial system. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because not all stocks may move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time.

India as an emerging nation is seeing a spate of innovations in the area of financial engineering. These financial innovations are a result of a number of Government regulations, tax policies, globalization, liberalization, privatization, integration with the international financial market and increasing risk in the domestic financial market. Alternative financial institutions including nationalized banks, commercial paper houses, insurance companies and investment banks play a significant role in creation, development and dissemination of new financially engineered products in the society. The following section discusses the recent innovations made on mutual funds.

Even with crashing equity markets, Arbitrage Funds have been able to generate positive returns. They are equity and derivative funds providing an ideal way of realizing reasonable returns from equities with risk hedged by derivatives. The Arbitrage Fund tries to capitalize on the stock price differences between the spot market (cash segment) and the derivative market (F & O segment). The fund tries to generate returns by availing the arbitrage opportunities that arise in case there is mispricing between the spot and derivative market. The returns can be generated irrespective of the overall market movement. The stock prices in the spot and the derivative market tend to coincide on the settlement day of the derivative segment. Hence, the fund manager can reverse his position by buying a contract in the future market and selling off his equity holding in the spot market. The main concern is how efficiently the assets are balanced between the spot and the derivative market. Empirically they have shown better results than debt or income funds. They provide good returns during volatile periods.

Various art funds can now be floated in the market after obtaining approval from SEBI. In this people can pool-in funds to fund the purchase of the art and sell it later at a premium. The return would then be divided amongst the investors. This product may be suitable for High Net worth Individuals (HNIs) and institutional investors but not for the retail investors. This product raises art as a credible asset class. Art has a very low correlation with equity markets making it ideal for a large portfolio.

Q.

14. Consider the following statements,
1] Foreign direct investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.

2] A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds.

Which of the above statements is/are correct?

______ is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds etc.