Which of the following is correct about the Sinking Fund?

A Sinking Fund is a special savings account with one specific goal - to accumulate money for a particular planned expense in the future.

Examples include:

• Saving to buy a new laptop in 2 years
• A company setting aside funds to replace machinery in 5 years
• Saving for college fees due next year

The defining characteristic is that it targets one specific, planned expense in the future.

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Option 1: "It is a long-term account which can be closed any time."

This is incorrect. While a sinking fund can be long-term, this does not define its purpose. The main feature is its specific goal, not the account duration or flexibility.

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Option 2: "It is set-up for a particular upcoming expense."

This is correct. A sinking fund is specifically created for a particular (specific) upcoming (future) expense. The account holder knows what they are saving for and when the funds will be needed.

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Option 3: "Any amount can be deposited at any point of time."

This is incorrect. Sinking funds typically involve planned, regular deposits calculated to reach a specific goal by a target date. For example, needing $12,000 in 2 years requires saving$500 per month. Random deposits would not ensure reaching the goal on time.

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Option 4: "It can be used in any emergency."

This is incorrect. This describes an emergency fund, not a sinking fund. A sinking fund is for planned expenses that are known in advance, while an emergency fund covers unexpected expenses like medical bills or car breakdowns.

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The correct answer is Option 2. A Sinking Fund is defined by being set up for a particular upcoming expense that is planned in advance.