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NISM-Series-VII: Securities Operations and Risk Management · Investor Grievances and Arbitration

Investor Protection Fund and Compensation for Broker Default

Updated 11 October 2026 · Fact-checked

The Investor Protection Fund (IPF) is a fund held by each stock exchange. It compensates genuine clients of a trading member who is declared a defaulter, up to a per-investor limit, when the member's own assets fall short. It does not cover market losses. The Investor Services Fund (ISF) is separate and funds investor services and awareness.

Understand Investor Protection Fund and Compensation

Investors trade through brokers. If a broker fails to pay or return what it owes to clients, the clients suffer a loss that has nothing to do with market movement. The IPF exists to cushion that loss.

Each exchange keeps its own Investor Protection Fund, run through a trust. It is built from sources such as penalties collected from members, a portion of listing fees, interest income and contributions from the exchange. It is a safety net, not a first source of payment.

When a member is declared a defaulter, the exchange first uses the defaulter's own assets, such as deposits and margins, to settle dues. Genuine client claims that remain unpaid can then be met from the IPF. A committee of the exchange examines each claim. Payment is capped at a compensation limit per investor, per defaulting member. Any amount above the cap is not paid by the fund. The investor must pursue it from the defaulter's remaining assets or in other legal ways.

The IPF covers only claims that arise from dealings on the exchange through the defaulting member, such as money or securities the broker owes. It does not cover losses from price falls, bad advice, or off-market deals. Do not confuse it with the Settlement Guarantee Fund, which protects the clearing corporation's settlement when a member fails to pay in. The IPF protects clients.

The Investor Services Fund (ISF) is different again. It is used for investor education, awareness and services. It does not pay compensation.

Key formulas to remember

Who the IPF protects
IPF → clients of a member declared a defaulter
Protects genuine investor claims, not the broker, not the clearing corporation.
Order of payment
Defaulter's assets first → then IPF (up to limit)
The IPF tops up genuine claims. It is not the first source.
Compensation payable
Payable = lower of (admitted claim, per-investor limit)
The limit applies per investor, per defaulting member. Verify the current limit figure in your latest NISM workbook, as limits have been revised.
Pro rata rule
If total admitted claims exceed available fund, payment is reduced proportionately
Applies only when the fund is insufficient. Check the wording in the workbook.
Fund distinction
IPF = compensation | ISF = investor education and services | SGF = settlement guarantee
Frequent trap in options.

How to solve Investor Protection Fund and Compensation questions

Use this method for any question on the IPF, ISF or compensation.

  1. 1Identify the fund named in the question: IPF, ISF or Settlement Guarantee Fund.
  2. 2Check the trigger. Compensation needs the member to be declared a defaulter. A market loss is not a trigger.
  3. 3Check who is claiming. It must be a genuine client of that member, with a claim from exchange-traded dealings.
  4. 4Apply the order of payment. The defaulter's assets are used first, then the IPF.
  5. 5Compare the admitted claim with the per-investor limit and pay the lower amount.
  6. 6If several claims are involved, apply the limit to each investor separately, then check whether the fund is sufficient.
  7. 7Match the answer to the option that follows the rule exactly, and reject options that give the wrong fund or purpose.

Quickest way: Three-check shortcut

When to use it: Use for one-line MCQs on purpose, coverage or limit under time pressure.

  1. Check 1: Is the member a declared defaulter? If not, no IPF compensation.
  2. Check 2: Is it a genuine client claim from exchange dealings? If it is a market loss or off-market deal, reject it.
  3. Check 3: Is the payout capped per investor per defaulting member? Pick the lower of claim and limit.
  4. If the option talks about education or awareness, it is the ISF.

Common mistakes in Investor Protection Fund and Compensation

  • Thinking the IPF compensates market losses.

    The word 'protection' sounds like it covers any loss.

    Fix: The IPF covers only losses from a broker's default on genuine claims. Price falls are never covered.

  • Mixing up the IPF and the Settlement Guarantee Fund.

    Both are exchange-related funds that act when a member defaults.

    Fix: The SGF supports the clearing corporation's settlement. The IPF compensates clients.

  • Treating the ISF as a compensation fund.

    Both names start with 'Investor' and both are funds.

    Fix: The ISF is for investor services and education. Only the IPF pays compensation.

  • Applying the compensation limit to all of a broker's clients together.

    Students read the limit as a total cap.

    Fix: The limit is per investor, per defaulting member.

  • Assuming the IPF pays before the defaulter's assets are used.

    The fund looks like the main remedy.

    Fix: The defaulter's assets are applied first. The IPF supplements them for genuine claims.

  • Memorising an old limit figure without checking the latest workbook.

    Older notes show different figures.

    Fix: Check the figure in the current NISM workbook and learn only that number.

Worked examples

Example 1

Assume the compensation limit is ₹25,00,000 per investor per defaulting member. A client of a defaulter has an admitted claim of ₹32,00,000, and the defaulter's assets have already been applied. How much can the IPF pay, and how much remains unpaid by the fund?

Show the solution
  1. The member is a declared defaulter and the claim is genuine, so the IPF applies.
  2. The defaulter's assets are already used, so the IPF can top up.
  3. Payable = lower of ₹32,00,000 and ₹25,00,000 = ₹25,00,000.
  4. Unpaid by the fund = ₹32,00,000 − ₹25,00,000 = ₹7,00,000.

Answer: The IPF pays ₹25,00,000. ₹7,00,000 is not paid by the fund; the client must seek it from other remedies.

Example 2

A client lost ₹4,00,000 because the shares he bought fell sharply. His broker is solvent and not a defaulter. Which fund compensates him: IPF, ISF, or neither? Explain.

Show the solution
  1. The loss is a market loss from price movement.
  2. The broker is not declared a defaulter, so the IPF trigger is missing.
  3. The ISF only funds investor education and services, so it does not pay compensation.

Answer: Neither. The IPF pays only on a member's default, and the ISF does not pay compensation.

Exam tips

  • Questions often ask for the purpose of each fund. Learn one line: IPF compensates, ISF educates, SGF guarantees settlement.
  • Look for the words 'declared defaulter' in the option. If missing, the option is usually a trap.
  • For limit questions, learn the current figure from the latest workbook and remember it is per investor, per defaulting member.
  • With negative marking of 25% of the question's marks, skip a question if two options both seem to fit and you cannot separate the funds.

Practice questions from Investor Grievances and Arbitration

Investor Protection Fund and Compensation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investor Protection Fund and Compensation: frequently asked questions

What is the Investor Protection Fund in a stock exchange?

It is a fund maintained by each exchange to compensate genuine clients of a member declared a defaulter. It is a safety net used after the defaulter's own assets are applied.

Does the IPF cover losses from falling share prices?

No. It covers only losses from a broker's default on dues to clients. Market losses are the investor's own risk.

What is the difference between the IPF and the ISF?

The IPF pays compensation to clients of defaulting members. The ISF funds investor education, awareness and services, and does not pay compensation.

Is the compensation limit the same for every investor?

The limit is a cap applied to each investor separately for a given defaulting member. Check the current figure in the latest NISM workbook, as limits have been revised over time.