Non-Banking Financial Services: NBFCs, Mutual Funds and Capital Markets
What this domain tests
How non-bank credit and market-based savings work: NBFC categories and limits, mutual fund structure and NAV arithmetic, and how a security moves from issue to settlement.
NBFCs
NBFCs are companies registered with RBI under Section 45-IA of the RBI Act. They lend and invest but cannot accept demand deposits or issue cheques. RBI's scale-based regulation places them in base, middle, upper and top layers according to size and complexity, with tighter norms at each layer. Common categories include investment and credit companies, infrastructure finance companies, microfinance institutions, housing finance companies (now regulated as NBFCs) and peer-to-peer platforms.
Mutual funds and markets
A mutual fund is a trust with four parties: sponsor, trustee, asset management company and custodian, with registrar and transfer agents servicing investors. SEBI regulates funds; AMFI sets distributor certification norms. NAV = (total assets − liabilities) ÷ units outstanding, declared daily.
The primary market raises fresh capital (IPO, FPO, debt issue) using ASBA so funds stay blocked until allotment; the secondary market trades existing securities through exchanges and depositories, with equity settlement on T+1.
Worked example
₹10,000 invested at NAV ₹25 buys 400 units. NAV later rises to ₹28, giving 400 × 28 = ₹11,200. If an exit load of 1% applies to redemption within 12 months, proceeds are 11,200 − 112 = ₹11,088, a gain of ₹1,088.
Traps
Mutual fund returns are never guaranteed and NAV is not a price an investor can negotiate. An NBFC is not a bank; do not credit it with demand deposits or cheque issuance. SIP does not remove market risk, it only averages purchase cost.