UPSC Essentials | Daily subject-wise quiz : Economy MCQs on Fund of Fund, leverage and more (Week 166)

4. It helps in risk reduction.

Select the correct answer using the codes given below:

(a) 1, 2, 3 and 4

(b) 2, 3 and 4 only

(c) 1, 2 and 4 only

(d) 1, 3 and 4 only

Relevance: Fund of Funds (FoFs) are important in the context of mutual funds, ETFs, international investing, and government-supported startup financing schemes. UPSC can test basic financial market concepts through statement-based questions.

Explanation

— Several large mutual fund houses have suspended fresh subscriptions into their gold exchange-traded funds (ETFs) and fund of funds (FoFs) as the ongoing conflict in West Asia continues to swell the country’s imports bill and put pressure on foreign exchange reserves.

What is FoF?

— A Fund of Fund (FoF) invests in other funds. Investment in these funds help investors spread their risks across various markets and assets class while benefiting from professional fund management.

Benefits of FoFs

— Diversification: FoFs offer diversification by investing in several funds across various sectors, locations, or asset classes. Hence, statement 1 is correct.

— Accessibility: They give small investors access to high-performing funds that would otherwise require a big amount of capital. Hence, statement 2 is correct.

— Expert Management: FoFs are overseen by professionals. It lowers the burden on individual investors. Hence, statement 3 is not correct.

— Risk Reduction: Spreading investments over multiple funds helps to reduce risk. Hence, statement 4 is correct.

Therefore, option (c) is the correct answer.

(Other Source: investor.sebi.gov.in)

QUESTION 2

Consider the following statements:

1. India meets all of its fertiliser requirements through domestic production and does not import fertilisers.

2. Fertiliser was one of the ‘3 Fs’ cited by the Finance Minister, along with fuel and foreign exchange to buy gold.

3. Fertilisers can be applied only in solid form.

Which one of the following conclusions based on the above statements is correct ?

(a) There are two correct statements, that include statement 2.

(b) There are two correct statements, that are statements 1 and 3.

(c) There is only one correct statement.

(d) All three statements are correct.

Relevance: The topic is frequently linked to subsidy reforms, food security, and global supply-chain disruptions. It also helps in understanding government interventions in the agricultural sector.

Explanation

— Rising global costs of fertilisers amid a supply crunch is likely to result in a subsidy burden of almost Rs 3.4 lakh crore, or an almost 100 per cent increase compared with the Budget estimate of Rs 1.7 lakh crore, according to top government sources.

— The war in West Asia and the closure of the key waterway of the Strait of Hormuz has led to a huge jump in fertiliser prices, with India’s latest purchases of urea from abroad having been at a cost-plus-freight price of $935-$959 per tonne, more than double the year-ago figure of $410-$420.

— Fertiliser was one of the ‘3 Fs’ cited by Finance Minister Nirmala Sitharaman last month – along with fuel and foreign exchange to buy gold – that required a focus amid pressures exerted on the rupee by the ongoing conflict as all these three items had to be paid for in foreign currencies and not rupees on account of them being imported. Hence, statement 2 is correct.

— India is one of the largest importers of fertiliser in the world, while China, Russia, and Morocco count among the biggest exporters. In mid-March, China banned the export of fertilisers to secure domestic supplies. Prior to the West Asia war, the Gulf nations of Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE), and Bahrain had a share of around 40% in India’s urea imports. Hence, statement 1 is not correct.

— Further, more than 60% of Indian imports of Liquefied Natural Gas (LNG) – used to produce urea domestically – was supplied by Qatar, UAE, and Oman. As such, in the first 11 months of 2025-26, India’s urea imports from China surged to 21.24 LMT from just 0.99 LMT in all of 2024-25. Meanwhile, urea imports from Russia rose more gradually in comparison to 13.99 LMT from 9.23 LMT.

— Fertiliser application: The manner in which fertilisers are applied can affect how well plants absorb nutrients. Proper timing and method improve crop response while reducing losses from water runoff or chemical reactions in the soil. Fertilisers can be applied as solids or liquids, depending on the crop, soil condition, and watering method. Hence, statement 3 is not correct.

Therefore, option (c) is the correct answer.

(Other Source: pib.gov.in)

QUESTION 3

Consider the following statements:

1. India has sufficient domestic cell manufacturing capacity to meet the rapidly growing demand for solar installations.

2. In 2025-26, India added around 45 GW of solar capacity.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Relevance: Solar manufacturing and installation capacity are important themes under renewable energy and energy security. UPSC can test government initiatives such as PLI schemes, domestic manufacturing, and import dependence in strategic sectors. The topic is also relevant to India’s climate commitments and green energy transition.

Explanation

— The Centre’s plan to install rooftop solar panels in 75 lakh households by year-end may hit a few bumps due to the limited availability and rising costs of these panels made from domestically-manufactured solar cells.

— DCR-compliant solar panels are those in which locally manufactured solar cells — components that convert sunlight into electricity — are used. According to the ministry, prices of DCR solar PV modules — domestically manufactured modules made using domestically produced solar PV cells — have risen in May.

— From June 1, the government made it mandatory for all domestic, commercial and industrial solar projects to use only locally manufactured solar cells in the solar panels deployed in those projects.

— India currently lacks sufficient domestic cell manufacturing capacity to meet the rapidly growing demand for solar installations. Hence, statement 1 is not correct.

— In 2025-26, India added around 45 GW of solar capacity. Against an annual solar module production of around 60-65 GW, India’s solar cell manufacturing capacity stands at only about 30 GW. As a result, a significant portion of the country’s module production has historically relied on imported cells. Hence, statement 2 is correct.

Therefore, option (b) is the correct answer.

QUESTION 4

Which of the following factors are taken into consideration for calculating the current account deficit/surplus?

1. Trade flows

2. Remittances

3. Foreign Direct Investment (FDI) inflows

4. Services exports

Select the correct answer using the codes given below:

(a) 1 and 2 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4

(d) 1, 2 and 4 only

Relevance: Current Account Deficit (CAD) or Current Account Surplus (CAS) is a recurring topic in Economy and can be linked to questions on Balance of Payments (BoP), exchange rates, and external sector stability. UPSC might test whether candidates can distinguish between current account and capital/financial account transactions.

Explanation

— The country’s current account surplus narrowed sharply to $7.1 billion, or 0.7% of GDP, in the fourth quarter ended March 2026, as a rising gold import bill and foreign investor outflows weighed on external balances, according to data released by the Reserve Bank of India. This marks a notable decline from the surplus of $13.7 billion, or 1.4% of GDP, recorded during the corresponding quarter of the previous financial year.

— The moderation in the current account surplus reflects changing dynamics in India’s external sector, with factors such as trade flows, services exports, remittances and investment income influencing the overall balance.

— Despite remaining in surplus territory, the lower figure indicates a reduced contribution from external earnings compared to the year-ago period. FII outflows increased to $12 billion in the March 2026 quarter as against outflows of $5.9 billion in the same period a year ago.

— Gold import bill for the March 2026 quarter was $22.57 billion and full year at $71.97 billion as against $9.5 billion and $58 billion, respectively in the previous year, RBI data said.

Note: FDI is part of the capital/financial account.

Therefore, option (d) is the correct answer.

QUESTION 5

In finance, the term ‘leverage’ refers to:

(a) investing only in government securities to eliminate risk.

(b) spreading investments across different asset classes to reduce volatility.

(c) using accumulated profits from past investments without any external funding.

(d) borrowing money to amplify the return from an investment.

Relevance: This question tests a basic concept from Economics and Financial Markets, an area UPSC increasingly covers under Economy and current affairs. UPSC may not ask the definition of “leverage” directly, but it may appear as a statement in an Economy MCQ, in questions on financial stability, or in a banking reform.

Explanation

— The Reserve Bank of India’s (RBI) Foreign Currency Non-Resident (Bank) deposit swap scheme, which aims to boost foreign inflows, is set to reward non-resident Indians (NRIs) with an alluring investment opportunity.

— In finance, leverage means borrowing money to amplify the return from an investment. The leverage is 2x if a person borrows two times the money they have, or their capital; it is 10x if ten times the capital is borrowed. For NRIs, it is this use of leverage that can allow them to make fantastic returns from FCNR(B) deposits.

— Suppose a non-resident in the US wants to deposit $1 million in an FCNR(B) deposit for three years. While simply depositing this money will offer an annual rate of interest of 6%, the NRI can go to an American bank and borrow $10 million — also for three years — at their lower interest rates and put the borrowed money in the FCNR(B) deposit.

— Currently, a three-year loan in the US will cost around 4.5% or so.

— In summary, the interest earned from the FCNR(B) deposit of $11 million in Year 1 is $660,000. Meanwhile, interest spent on the borrowed $10 million is $450,000. This results in a net gain of $210,000.

Therefore, option (d) is the correct answer.

Previous Daily Subject-Wise-Quiz

Daily Subject-wise quiz — History, Culture, and Social Issues (Week 157)

Daily subject-wise quiz — Polity and Governance (Week 166)

Daily subject-wise quiz —  Science and Technology (Week 166)

Daily subject-wise quiz — Economy (Week 165)

Daily subject-wise quiz — Environment and Geography (Week 165)

Daily subject-wise quiz – International Relations (Week 165)

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