GOLD ETF

A PROJECT REPORT
Under the guidance Of Mr. David Easow

Submitted by Barham Kumar in partial fulfillment o f the requirement for the award of the degree

Of MBA IN Finance January 2010

BONAFIDE CERTIFICATE
Certified that this project report titled GOLD ETF is the bonafide work of BARHAM KUMAR who carried out the project work under my supervision.

SIGNATURE HEAD OF THE DEPARTMENT

SIGNATURE FACULTY IN CHARGE

ACKNOWLEDGEMENT

The completion of any project depends upon the co-operation, coordination and combined efforts of several resources of knowledge, inspiration & energy. Words fall short acknowledging immense support lent to me yet I will try to give full credit to the deserver's. My sincere thanks goes to Mr. David Easow (HOD) giving me an opportunity to discover more knowledge. I am also thankful to Mr. Anurag Agnihotri (Proffesor,Finance) for his support, guidance and cooperation throughout to accomplish this project.

Executive Summary
Exchange Traded Funds (ETFs) are mutual fund units which investors buy/sell from the stock exchange, as against a normal mutual fund unit, where the investor buys /sells through a distributor or directly from the AMC. Practically any asset class can be used to create ETFs. Globally there are ETFs on Silver, Gold, Indices. Gold ETFs are a special type of ETF which invests in Gold and Gold related securities. Investors can buy G-ETF units from secondary markets either from the quantity being sold by the APs or by other retail investors. Retail investors can also sell their units in the market. Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure to indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a lower cost than many other forms of investing. Gold backed Exchange Traded Funds (ETFs) are securities designed accurately to track the gold price. ETF liquidity is supported by large professional market makers and dealers, in the normal way of providing liquidity on the relevant stock exchange. Additionally there is the facility to create and redeem new units - on demand.
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TABLE OF CONTENTS CHAPTER Particulars Page No.

1 2 3 4 5 6 7 8 9 10

Introduction Objective Gold ETF in India Creation and Redemption Structure of ETF Comparison Research Methodology Analysis Result and Conclusion Bibliography

5 11 12 27 30 36 37 48 50 51

Introduction
ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day like any stock. Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money. Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure to indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a lower cost than many other forms of investing. Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value. Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of gram of Gold. They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is
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invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares. Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings. History Deregulation of Gold in India In India goldsmiths are usually men, and are referred to by a variety of names depending on the region. In the Vedic period (Second Millennium BC), goldsmiths had a much higher standing in society than most other artisans, probably because they worked with a precious metal. The goldsmiths enjoyed royal patronage. Historical evidence suggests that Indian jewellers had early mastery of the various skills required to make fine jewellery, such as mixing alloys, moulding, setting stones, inlay work, relief, drawing gold and silver into fine wires, plating and gilding. The duties of the goldsmith have been defined in an ancient social code, but are observed more by breach than by adherence. There is hardly any village or town, even in the remote corners of the country, where there is no goldsmith.

Gold Econony Today, the gold/jewellery industry is fast-growing, with impressive domestic and export sales. Gems and jewellery constitute one of the fastest growing export sectors in India, accounting for one-fifth of the aggregate exports. The current size of the gold economy is around US$ 6 billion and employs over half a million people. The number of gold jewellery manufacturing units is put at 100,000. Also, a large number of skilled goldsmiths/gold merchants from India are engaged in gold trade and industry in almost all the oil-rich Middle Eastern countries. However, for a long time in the existence of the gold economy, the producers and consumers of gold jewellery hardly found a place in any policy discussion on gold. Economic Reform and Gold The reform process triggered by the balance of payment crisis in 1990-91 resulted in a review of important external sector policies of the post-independence era. The restrictive policy on gold achieved very little in terms of its stated objectives. Large quantities of gold were routinely smuggled into India and the nexus between gold smugglers, the so-called hawala operators, and perpetrators of highprofile crimes became common knowledge.The smuggling operation was so extensive that a few professional salvage companies in he west had looked at the lucrative prospect of salvaging substantial quantities of jettisoned gold lying in the seabed off the west coast of India. The first major policy reversal in respect of gold came in the form of repeal of the Gold (Control) Act, 1968 in 1990. Subsequently, the provisions of the Foreign Exchange Regulation Act (FERA), 1973 (the successor legislation to FERA 1947) relating to gold were also repealed in 1993. The FERA treated gold and
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silver on the same footing as foreign exchange for exchange control purposes. Also, it empowered the federal government to impose curbs on use/disposal/dealings in gold and silver priorto or at the time of their import into India. More than an admission of failure to meet any of the prime objectives pursued in respect of gold, these steps symbolized a more realistic and a less ideologically charged approach toward gold. It is interesting to note that long before the advent of the reform in 1990-91, the gold control policy of the government was reviewed from time to time by committees appointed for this purpose, looking critically at most of the important aspects. One such exercise undertaken in 1978 examined the core restrictions of the Gold (Control) Act 1968 and recommended various relaxations. It also examined the question of issuance of more gold bonds by the government, but came out against this on the grounds that it would be inconsistent with the governments policy to encourage financial assets other than gold. Gold came under policy focus and much media attention in the fall of 1991, when gold stocks of around 65 tonnes, (taken from the RBI as well as the government stocks) were taken out of the country for raising short-term foreign currency resources to tide over immediate external payment difficulties. Although this move came in for a lot of political criticism, with some equating it with mortgaging national honour, most academics and policymakers saw in it a golden opportunity to make a fresh start on gold.

Gold Market in India The gold market in India is predominantly a market for buying and selling physical gold. In the wholesale segment, nominated agencies are the bulk importers. This market is reasonably efficient from the point of view of distribution of bars and scraps over the length and breadth of the country, which takes place in a very effective manner. Price uniformity is also generally observable in areas with identical incidence of duties and tax. Gold lending/leasing volumes are small in comparison to physical buying and selling. Most of the leasing activities are undertaken by nominated banks on a back-to-back basis via supply from overseas. Domestic lending resources are still meagre, as mentioned before. This segment of the market needs to develop for at least two reasons: To provide working capital at low cost together with gold price hedging, not only to the exporters but also to jewellery manufacturers for the domestic market. At present, non-exporters do not receive the necessary working capital finance in rupees from the banking system.The evidence of the significant contribution made by the spread of gold leasing, even to small family jewellery units, in boosting exports and local sales in Italy could provide guidance in the matter. The existence of a gold lending/leasing market is a pre-condition for arbitrage-free pricing of gold forward/swap contracts in the local market. Why should an investor invest in Gold ETF?

No worry on adulteration Gold provides diversification to the portfolio

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Gold is considered as a Global Asset Class Gold is used as a Hedge against Inflation Gold is considered to be less volatile compared to equities Held in Electronic Form Store of value Extremely Liquid

Advantages of Investing in Gold ETFs

Potentially cheaper to have price exposure to gold price as compared to other available avenues Quick and convenient dealing through demat account No storage and security issue for investors Transparent pricing Taxation of Mutual Fund Can be traded on stock exchange like buying / selling a stock Ideal for retail investor as minimum lot size to trade is one unit on secondary market NAV of a unit will track price of approximately 1 gram of gold

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Objective of Study
TO know the awareness and Popularity of Gold ETF in Public. To know the varinace between differnent Gold ETFs. Analysis of Gold ETFs

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Gold ETF Funds in India

1. Benchmark Gold ETF (GOLDBEES) lists on NSE Benchmark Assent Management Company, a Mumbai-based mutual fund house, has listed India's first gold exchange traded fund (EFT) Gold BeES on the National Stock Exchange Feb 07. Listed at rs. 950 per gram BeES soon gained momentum with price surged to Rs 1104 but slumped due to profit booking to Rs 947 within an hour of the launch. Allotment price, however, remained at Rs 945.7 pergram. The trading unit for BeES has been fixed at one gram with a tick size of one paisa. This instrument offers only trading and holding it in DMAT account and not the physical delivery of gold. "Gold BeES, like any other mutual fund instrument, would attract common men to save in small quantity with a minimum possible monthly balance of Rs 1000 (roughly equivalent to the price of one gram gold BoES) which, if continued, may accumulate over a period of time to give handsome amount on the occasions like daughter's wedding or higher education of their child," A P Kurian, chairman, AMFI said.

He further added that the New Year was adding a new benchmark in the history of mutual funds with the addition of BeES to the securities portfolio. Looking at the success of gold exchange traded funds in the countries like the US, South Africa and Australia which has created an asset of about $12 billion, this

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production in India is all set to attract good amount of retail participation from the common man, Kurian said. Gold BeES is designed to provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. Entry Load Slabs will be as below: Rs. 10,000 to Rs. 49,99,000 - 1.5% Rs. 50,00,000 to Rs. 1,99,99,000 - 1.0% Rs 2,00,00,000 to Rs 4,99,99,000 - 0.5% Rs. 5,00,00,000 and above - Nil There will be no exit load charge by the Fund The total expense ratio will be maximum of 1% per annum. Since Gold BeES is classified under Mutual Fund, investor investing in this need not pay Wealth Tax. The scheme will have Non equity Mutual Fund taxation, applicable as per current Tax laws, which investor has to pay after redemption. 2. UTI GOLD Exchange Traded Fund UTI Gold Exchange Traded Fund is an open ended exchange traded fund. The investment objective of the scheme is to endeavor to provide returns that, before expenses, closely track the performance and yield of Gold. However the performance of the scheme may differ from that of the underlying asset due to tracking error.

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Issue Open 01-Mar-2009 Scheme Objective Mutual Fund Family Fund Class Fund Type Investment plan Fund Manager Entry Load Exit Load Comment

Issue Close 16-Mar-2009

UTI Asset Mgmt Company Pvt. Ltd. Gold Open-Ended Dividend Swati Kulkarni 0.00 % 0.00 % None

A gold ETF was eagerly awaited by US investors. Now, there are two to choose from. One is IAU from Barclay's Global Investors. The other is GLD from State Street. State Street's started trading first and has managed to capture a larger slice of the market. In February, the GLD ETF held $6 billion worth of assets. However, both should be equivalent bets for those looking to invest in gold. In its first three days of trading, GLD traded roughly 30 million shares and nearly all of that has been a new buyer if you believe the press for one, am not interested in holding too much of this particular asset class. Why? Because gold has no real use in the world. Sure, it is admired and hoarded by people across the globe, but it doesn't generate value on its own. Warren Buffet said it best, "I would rather own assets that

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produce value. Dow went from 66 to 12000 and paid dividends. If you owned Gold you paid 20 and went to 400 a hundred years later." However some investors are attracted since gold is likely to increase in value when other areas of the market are suffering. As such, it is used as hedge against other investments. Regardless, I prefer to invest in the long-term returns that company stocks and bonds offer. This isnt to say that I dont own any gold. In fact, the commodities ETF that have is 10% gold. Note that gains from the gold ETF will be taxed at the collectibles rate of 28% vs. the long-term capital gains rate of 15%. If you're going to invest in this ETF, you might want to consider using a tax deferred account. And since gold doesn't produce income, partial shares of your holdings will be sold to pay for management fees. 3. Kotak Gold Exchange Traded Fund Investment Objective: the investment objective of the scheme is to generate returns that are in line with the return on investment in physical gold, subject to tracking errors. Type of fund: Kotak Gold ETF is open ended fund. The ongoing of the scheme commenced from August 8, 2007. The fund creates/redeem the scheme units in large size known as creation unit. The value of unit is 1000 gram of physical gold or multiple thereof called as the portfolio deposit and a cash component which will be exchanged for corresponding number of units. The portfolio deposit and cash component may change from time to time and will be announced by fund on its website.
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Issue Open 01-july-2009 Scheme Objective Mutual Fund Family

Issue Close 08-Aug-2009

Kotak mahindra Asset Mgmt Company Pvt. Ltd.

Fund Class Fund Type Investment plan Fund Manager Entry Load Exit Load Comment

Gold Open-Ended Dividend Mr. Abhishek Bisen 0.00 % 0.00 % None

Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action. Some of the risk factors listed in the prospectus are the loss, damage, theft or restrictions on access to the Trust's gold the lack of adequate sources of recovery if the Trust's gold is lost, damaged, stolen or destroyed, including a lack of insurance the failure of gold bullion allocated to the Trust to meet the London Good Delivery Standards the failure of sub-custodians to exercise due care in the safekeeping of the Trust's gold the limited ability of the Trustee and the Custodian to take legal action against sub-custodians; the insolvency of the Custodian the Trust's obligation to reimburse the Purchaser and the Market Agent for certain liabilities in the event the Sponsor fails to
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indemnify them the lack of experience of the Sponsor and its management in operating an investment vehicle such as the Trust competing claims over ownership of intellectual property rights related to the Trust.

4. Reliance Gold Exchange Traded Fund Reliance Gold Exchange Traded Fund (RGETF) is an open ended Gold Exchange Traded Fund which will track the performance of Gold Bullion. The units issued under the scheme will represent the value of gold held in the scheme. It is designed to provide returns that, before expenses, closely correspond to the returns provided by domestic price of Gold. Gold ETF is a security listed on the stock exchange available for trading with an intention to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. Product Features Type: An open-ended Gold Exchange Traded Fund that tracks the domestic prices of gold through investments in physical Gold. Investment Objective: The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors. Options: Only Dividend Pay-out Option

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Minimum Application Amount On going purchase directly from mutual fund would be available only to the Authorized Participants provided the value of units to be purchased is in creation unit size. Authorized Participants may buy the units on any business day for the scheme directly from the mutual fund at applicable NAV and transaction charges, if applicable, by depositing Gold or cash, value of which is equal to creation size. Each creation unit consists of 1000 units and cash components, if any, of Reliance Gold Exchange Traded Fund. RGETF units will be credited to the unit holders demat account on the date of realization of instrument, at the applicable NAV. The AMC will appoint Authorized Participants to provide liquidity in secondary market on an ongoing basis. The Authorized Participants would offer daily two way quote in the market. Modes of payment for subscriptions & redemptions during NFO & continuous offer with the AMC During NFO all the subscriptions will happen by cash (by issuing a cheque / DD) however during continuous offer the transactions with the AMC by Authorized Participants & Large Investors can happen by issuing a cheque / DD or by transferring requisite gold (as per LBMA Good Delivery Norms referred in the Offer Document) to the funds Designated DP account (in the form of Portfolio Deposit) while the balance Cash Component, if any has to be paid to the AMC. Please refer to the offer Document for further details. Allotment Price

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Allotment price will be equal to the face value of Rs100/- plus premium equivalent to the difference between the face value and price of one gram of gold on the date of allotment For example :
If on the date of allotment the price of 10 gm of gold is 9000, then the allotment price becomes as follows;

Rs 100 + premium equivalent to the difference between the face value and price of one gram of gold on the date of allotment. i.e Rs 100 + Rs (900-100) = Rs 900 approx (The above example is for illustration purpose and does not include the expenses of the scheme) Purity of Gold All gold bullion held in the schemes allocated account with the custodian shall be of fineness (or purity) of 995 parts per 1000 (99.5%) or higher. Load Structure: During NFO and Continuous Offer

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Entry Load: Less than Rs. 1 lacs Rs. 1 lacs & less than Rs. 25 lacs Rs. 25 lacs & less than Rs. 50 lacs Rs. 25 lacs & less than Rs. 1 crs Rs 50 lacs & less than Rs 1cr 1.50% 0.75% 0.50% 0.25% 0.25% & NOT Rs 25 lacs & less.. Entry Load: Nil During continuous offer: Entry & Exit Load: NIL Listing: The Fund would endeavor to get the units of the Scheme listed on the National Stock Exchange and / or any other stock exchange(s) as may be decided by the AMC within 30 days from the closure of the New Fund Offer period. Liquidity : After the close of the NFO, as RGETF would be listed on the Exchange, subsequent buying or selling by Unit holders can be made from the secondary market. The minimum number of Units that can be bought or sold on the exchange is 1 (one) unit. All investors including Authorised Participants and large investors may sell their units in the stock exchange(s) on which these units are listed on all the trading days of the stock exchange. The trading will be as per
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the

normal

settlement

cycle.

Alternatively, Authorised Participants and Large investors can directly buy / sell Units in blocks from the Fund in Creation Unit size, as defined in this Offer Document on all working days. Mutual fund will repurchase units from Authorised Participants and Large investors on any business day provided the units offered for repurchase is not less than 100 units.

5. Quantum Gold Exchange Traded Fund The Quantum Gold Fund (QGF) seeks to offer investors an innovative, costefficient and secure way to invest in gold. The QGF is an Open Ended Fund, which is listed on the National Stock Exchange (NSE) in the form of an Exchange Traded Fund (ETF) tracking domestic prices of gold. The scheme enables investors to participate in the gold bullion market without taking physical delivery of gold, and to buy and sell units just like a stock on any of the recognized exchanges where it is listed.. Investment Objective The investment objective of the Quantum Gold Fund is to provide returns that, before expenses, closely correspond to the returns provided by the domestic price of gold. Scheme Details Each unit of the QGF will be approximately equal to price of half () gram of Gold. In the New Fund Offer (NFO) period, the Fund will accept cheque or demand draft. The minimum amount of investment is Rs.5,000/- and in multiples
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ofRs.1,000/-thereafter. After the NFO, the QGF units are listed on the NSE and investors can buy or sell units just like any equity share. Investors can buy or sell QGF units through member-brokers on the NSE. The minimum quantity for buying and selling would be at least 1 unit. Ongoing Sales/Redemption
On an ongoing basis (after the NFO), direct purchases from the Fund would be restricted to only Authorized Participants and Eligible Investors. Authorised Participants and Eligible Investors can buy/redeem in creation unit size and multiples thereof directly from the Fund on all business days. Retail investors can buy and sell only on the exchange

Creation Unit Size Creation Unit Size is the number of QGF units, which is exchanged for the Portfolio Deposit and cash component. The Portfolio Deposit shall consist of physical gold of defined purity and quantity, and the cash component represents the difference between the applicable NAV of units in creation unit size and the market value of physical Gold. The facility of creating/redeeming units in creation unit size will be available only for the Authorized Participants and large or eligible investors as defined in the Scheme Information Document. The Fund may from time to time change the size of the creation unit size in order to equate it with marketable lots of the underlying instruments. Through the lower cost of operations and the availability of units having smaller denominations, the Quantum Gold Fund would provide investors an excellent means of asset allocation. Thus, an investor can buy gold in unit form, with each unit being approximately equal to gram of Gold, for as low as around Rs. 600 per unit at the current prices. (As on January 9th, 2008) Gold ETFs offer the best
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of both worlds. The investor has the advantages of owning physical gold, without incurring additional expenses and losses like making charges (for gold jewellery), and bank vault charges (for keeping coins or bars or jewellery). If investors purchased gold from the retail jeweller or a bank, it would have cost at least a straight loss to the extent of the premium paid (which usually ranges from 5 to 20%). And there are no concerns of quality or theft The gold backing the ETF is certified by the London Bullion Market Association and stored in vaults of the custodian / sub-custodians. The fund house takes care of all risks of storage and safety. Buying and selling is very easy. Like any other security, you just buy and sell it though your broker on the stock exchanges. And unlike your jeweler and bank, you do not suffer premiums or making charges in the transactions. About the Quantum Gold Fund. The Quantum Gold Fund is an Open Ended Exchange Traded Fund (ETF) launched by Quantum Mutual Fund and listed on the NSE. It will track domestic prices of Gold through investments in physical Gold. How to purchase and sell Quantum Gold Fund units.

The Quantum Gold Fund Highlights Minimum Investments Minimum target amount during initial offer period Face value per unit Rs 5,000 (multiples of 1000) Rs. 10 Lacs Rs. 100/-

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Entry and Exit Load structure Entry Load Exit Load Exit Load Entry Load Authorized Participants Eligible Investors Nil Nil 0.50%

The load structure is however, subject to change from time to time and such changes shall be implemented prospectively. Liquid Liquid Benchmark Exchange Traded Scheme Liquid BeES (Liquid Benchmark Exchange Traded Scheme) is the first money market ETF (Exchange Traded Fund) in the world. The investment objective of the Scheme is to provide money market returns. Liquid BeES will invest in a basket of call money, short-term government securities and money market instruments of short and medium maturities. It is listed and traded on the NSE Capital Market Segment and is settled on a T+2 Rolling basis. The Fund will endeavor to provide daily returns o the investors, which will accrue in the form of daily dividend, which will be compulsorily reinvested in the Fund daily. The units arising out of dividend reinvestment will be allotted and credited to the Demat account of the investors at the end of every month. Such units of Liquid BeES will be allotted and credited daily, up to 3 decimal places.

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How ETFs is different from Traditional Mutual Funds

Since ETFs trade like stocks, they offer a degree of flexibility unavailable with traditional mutual funds. Specifically, investors can trade ETFs intra-day, monitor price discovery throughout the trading day and employ the usual arsenal of order types such as limit and stop loss orders-available in single stock trading. In a mutual fund, by comparison, investors can purchase traditional mutual funds only at the fund's NAV, which is published at the end of each trading day. (Typically, orders to buy or sell mutual fund shares must be placed at least an hour or two prior to market close). This difference gives rise to an important advantage of ETFs over traditional mutual funds. Because they are relatively liquid, ETFs are immediately tradable; therefore, the risk of price movement between investment decision and time of trade is substantially less when ETFs are used in lieu of traditional funds. For example, suppose an investor decides to purchase index exposure at 10.00 A.M. via a traditional mutual fund and during the balance of the trading day, suppose the index gains 1%. The investor will miss the opportunity, as he will be able to purchase the fund only at the day's closing NAV. The ability to reduce the time between the investment decision and the trade execution is critical, more so in a volatile market. Delaying a purchase decision until next day's closing price when a decision was made the previous evening introduces slippage costs that increase with the range of price moves during the trading day. The redemption process is also different for ETFs and mutual funds. While ETFs are redeemed in-kind (by exchanging basket of shares) as opposed to cash, mutual
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fund units are redeemed in cash, as the fund must sell shares in the open market to meet redemptions. closed-end funds, which also trade on exchanges, are different from ETFs as they have a static amount of shares outstanding. For that reason, a close-ended fund may trade at a premium or a discount to its net asset value for a protracted period of time. (The vast majority, however, trade at a discount.) Exchange-traded funds, on the other hand, trade close to the net asset value of the underlying portfolio since new ETF shares can be created and redeemed.

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Creations and Redemptions

ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares of companies comprising the index from various categories of investors like authorized participants, large investors and institutions. In turn, it issues them a large block of ETF units. Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a "Creation Unit" is exchanged for a "Portfolio Deposit" of stocks and "Cash Component". The number of outstanding ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units; or it may reduce on a day if some ETF holders redeem their ETF units for the underlying shares. These transactions are conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit closely approximates the proportion of the stocks in the index together with a specified amount of Cash Component. This in-kind creation / redemption facility ensures that ETFs trade close to their fair value at any given time. Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares. ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the
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Exchange. If the value of the underlying index is higher than the price of the ETF, the investors may redeem the units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of the underlying securities is lower than the ETF, the investors may create ETF units by depositing the lower-priced securities. This arbitrage mechanism eliminates the problem associated with closed-end mutual funds viz. the premium or discount to the NAV.

Applications of ETEs Efficient Trading : ETFs provide investors a convenient way to gain market exposure viz. an index that trades like a stock. In comparison to a stock, an investment in an ETF index product provides a diversified exposure to the market. Depending on the index, investors may obtain exposure to countries/ markets or sectors. Equitising Cash : Investors with idle cash in their portfolios may want to invest in a product tied to a market benchmark like an index as a temporary investment before deciding which stocks to buy or waiting for the right price. Managing Cash Flows : Investment managers who see regular inflows and outflows may use ETFs because of their liquidity and their ability to represent the market. Diversifying Exposure : If an investor is not sure about which particular stock to buy but likes the overall sector, investing in shares tied to an index or basket of stocks provides diversified exposure and reduces stock specific risk.
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 Filling Gaps : ETFs tied to a sector or industry may be used to gain exposure to new and important sectors. Such strategies may also be used to reduce an overweight or increase an underweight sector. Shorting or Hedging : Investors who have a negative view on a market segment or specific sector may want to establish a short position to capitalize on that view. ETFs may be sold short against long stock holdings as a hedge against a decline in the market or specific sector.

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Structure of ETFs

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Fees
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. In the United States sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate rather than the 15% long-term capital gains rate for non-collectibles. Funds Exchange Traded Gold Following the launch of Gold Bullion Securities on 28 March 2003 in Australia, a number of associated GETFs were soon launched on other stock exchanges. These GETFs are grouped under the name Exchange Traded Gold. Exchange Traded Gold is listed under: In Europe: ETFS Physical Gold (previously named Gold Bullion Securities) (ASX: GOLD)
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 ETF Securities Gold Bullion Securities (LSE: GBS and Euronext: GBS) (previously marketed by Lyxor) In the United States: SPDR Gold Trust (formerly streetTRACKS Gold Shares) (NYSE: GLD, SGX:GLD 10US$, TYO: 1326 and SEHK: 2840) New Gold Issuer (JSE: GLD) Exchange Traded Gold is sponsored by the World Gold Council, and as of August 2007 held 627.92 tonnes of gold in storage.[3] SPDR Gold Trust marketed by State Street Global Markets LLC, an affiliate of State Street Global Advisors, accounts for over 80 percent of this gold. As of 2008, SPDR Gold Trust is the largest and most liquid GETF on the market. ETFS Physical Gold In September 2006 ETF Securities launched ETFS Gold (LSE: BULL) which tracks the DJ-AIG Gold Sub-Index, and later in April 2007 ETFS Physical Gold (LSE: PHAU) which is backed by allocated gold bullion. ETF Securities physical gold ETCs - ETFS Physical Gold (PHAU) and Gold Bullion Securities (GBS) - are all backed by allocated gold bars uniquely identifiable bars which carry no bank credit risk. The precious metal bars are held in trust in London by the Custodian HSBC Bank USA N.A., the worlds leading Custodian for ETCs. The metal held with the Custodian must conform to the rules for Good Delivery of the London Bullion Market Association (LBMA). Securities are only issued once metal is confirmed as being deposited into the Companys

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bullion account with the Custodian. Consistent with allocated gold, no precious metal is borrowed, loaned out nor does it earn any income. As of Jan 09 ETFS Securities is the largest gold ETF provider in europe.

iShares COMEX Gold Trust The iShares COMEX Gold Trust was launched by iShares on 21 January 2005 and is listed on the New York Stock Exchange (NYSE: IAU) and Toronto Stock Exchange (TSX: IGT). As of April 28, 2009 the fund held 62.32 tonnes of gold in storage. ZKB Gold ETF The ZKB Gold ETF was launched on 15 March 2006 by Zrcher Kantonalbank and is listed in Switzerland under the symbol ZGLD. Shares are sold in 1 kg gold units, with a minimum purchase of one unit. As of August 2007, ZKB Gold ETF held 22.0 tonnes of gold in storage. Central Fund of Canada The Central Fund of Canada (TSX: CEF.A and NYSE: CEF) is a closed-end fund headquartered in Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in a mixture of gold and silver with a small percentage of cash. The custodian of the gold and silver assets is the main Calgary branch of CIBC. As of March 2008, the Central Fund of Canada held 28.48 tonnes of gold and 1423.66 tonnes of silver in storage.
33

Central Gold Trust The Central Gold Trust (TSX: GTU.UN, TSX: GTU.U and NYSE: GTU) is a closed-end fund operated by many of the same individuals, and employing many of the same practices, as the Central Fund of Canada. Unlike its sister fund, however, the Central Gold Trust is mandated to keep the bulk of its assets in gold, and does not hold silver. As of March 2008, the Central Gold Trust held 5.21 tons of gold in storage. Gold Benchmark Exchange Traded Scheme On 19 March 2007 Benchmark Asset Management Company, a Mumbai-based mutual fund house, launched Gold BeES (NSE: GOLDBEES) on the National Stock Exchange of India. Shares are sold in approximately 1 gram gold units. UTI Gold Exchange Traded Fund On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The objective of UTI Gold Exchange Traded Fund is to endeavor to provide returns that, before expenses, closely track the performance and yield of Gold. Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be credited to investors demat accounts. Gold-Price-Linked Exchange Traded Fund On 10 August 2007, Gold-Price-Linked Exchange Traded Fund (code "1328") listed on the Osaka Securities Exchange, Japan. Shares are sold in 1 gram gold units, with a minimum purchase of ten units. This GETF is not backed by
34

physical gold but by special bonds traded in London which are linked to the gold price. PowerShares DB Gold ETF and ETNs (PowerShares/Deutsche Bank) Tracks the performance of certain index moves inside the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold. ETNs are exchange-traded notes, which differ from exchange-traded funds (ETFs).

35

Comparison of Gold ETF with Physical Gold

Parameter How Gold is held Pricing Jewelers Bank Physical (Bars / Physical (Bars / Coins) Coins) Differs from one to Differs from bank another. Neither to bank. Not transparent nor Standard. standard. Gold ETF Dematerialized (Electronic Form) Linked to International Gold Prices and very transparent.

Buying Premium above Likely to be more Likely to be more Likely to be less gold price Making Charges are Charges are No Charges are incurred Charges incurred incurred Impurity Risk High Nil Nil Storage Locker / Safe Locker / Safe Demat Account Requirement Security of Investor is Investor is Fund House takes the Asset responsible responsible responsibility Conditional and Banks do not buy Resale At Secondary Market Prices uneconomical back Less convenient, Convenience in Less convenient, as More Convenient, as held in as Gold needs to Buying / Gold needs to be electronic form under the demat be moved Selling moved physically account physically Available in Available in Quantity to Minimum is or 1 gram standard standard Buy / Sell according to the fund denomination denomination Bid Ask Very High Cant Sell Back Very Low Spread Risk of Theft Yes, possible Yes, possible No, Not possible Wealth Tax Yes Yes No Long Term Capital Gains Only after 3 years Only after 3 years After 1 year Tax
36

RESEARCH METHODOLOGY Secondary Data I. SKEWNESS Skewness describe asymmetry from the normal distribution in a set of statistical data. Skewness can come in the form of "negative skewness" or "positive skewness", depending on whether data points are skewed to the left (negative skew) or to the right (positive skew) of the data average. Negative skew: The left tail is longer; the mass of the distribution is concentrated on the right of the figure. It has relatively few low values. The distribution is said to be left-skewed. Positive skew: The right tail is longer; the mass of the distribution is concentrated on the left of the figure. It has relatively few high values. The distribution is said to be right-skewed.

Source- Skewness - Wikipedia, the free encyclopedia.htm

Skewness is extremely important to finance and investing. Most sets of data, including stock prices and asset returns, have either positive or negative skew rather than following the balanced normal distribution (which has a skewness of
37

zero). By knowing which way data is skewed, one can better estimate whether a given (or future) data point will be more or less than the mean .Most advanced economic analysis models study data for skewness and incorporate this into their calculations. Skewness risk is the risk that a model assumes a normal distribution of data when in fact data is skewed to the left or right of the mean

38

TABLE- 1.1 Month

Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09

Benchmark NAV 945.4541 940.4872 893.4265 876.1564 880.3478 887.2831 935.7657 973.0185 1035.861 1031.232 1131.715 1190.288 1267.401 1179.574 1211.464 1230.128 1300.312 1167.096 1215.513 1276.098 1191.37 1285.379 1342.77 1481.607 1522.739 1433.229 1440.682 1446.332 1454.058

UTI NAV 937.3458 893.6763 877.0542 881.2746 888.6244 937.8366 974.4634 1037.613 1033.43 1133.995 1192.831 1266.205 1180.68 1214.134 1232.896 1303.126 1169.524 1218.141 1272.639 1203.437 1288.289 1339.655 1487.818 1523.885 1434.158 1442.595 1449.078 1457.173

Kotak NAV

Reliance NAV

Quantam NAV

882.3436 889.5782 938.2891 975.7427 1038.926 1034.26 1135.073 1193.836 1270.998 1182.541 1158.586 1233.496 1303.705 1173.577 1211.857 1282.453 1203.887 1288.67 1346.147 1490.018 1526.056 1437.899 1444.074 1450.091 1457.491

1041.069 1027.807 1123.458 1179.419 1254.922 1165.983 1198.634 1216.781 1286.13 1152.213 1198.67 1243.208 1174.442 1233.083 1311.78 1448.862 1483.273 1396.233 1404.696 1410.565 1418.224

1236.447 1259.423 1175.705 1208.373 1226.84 1296.946 1163.65 1217.317 1270.181 1186.89 1285.355 1339.609 1476.716 1516.569 1428.574 1436.832 1443.234 1451.348

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TABLE 1.2 Return on Gold Exchange traded fund Month

Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09

Benchmark -0.00229 -0.02229 -0.00848 0.002073 0.003408 0.023105 0.016954 0.02718 -0.00195 0.040381 0.021915 0.027262 -0.03119 0.011585 0.00664 0.024097 -0.04694 0.017653 0.021125 -0.02984 0.032984 0.018971 0.042731 0.011892 -0.02631 0.002253 0.0017 0.002314

UTI -0.02072 -0.00815 0.002085 0.003607 0.023409 0.016638 0.02727 -0.00175 0.04033 0.021968 0.025925 -0.03037 0.012134 0.00666 0.02406 -0.04698 0.017689 0.019008 -0.02428 0.02959 0.01698 0.045557 0.010403 -0.02636 0.002548 0.001947 0.002419

Kotak

Reliance

Quantam

0.003546 0.023153 0.016999 0.027249 -0.00195 0.040394 0.021921 0.0272 -0.03133 -0.00889 0.027209 0.024042 -0.04567 0.01394 0.02459 -0.02746 0.029556 0.018951 0.044099 0.010379 -0.02584 0.001861 0.001806 0.002211 -0.00557 0.038645 0.021111 0.026949 -0.03192 0.011994 0.006526 0.024073 -0.04775 0.017167 0.015844 -0.02471 0.021161 0.026869 0.043166 0.010194 -0.02626 0.002625 0.001811 0.002352 0.007996 -0.02987 0.011903 0.006587 0.024134 -0.0471 0.019581 0.018462 -0.02945 0.034612 0.017955 0.042319 0.011565 -0.02596 0.002503 0.001931 0.002435

Mean Skewness

.006676 -.64859

.007097 .009082 -.064454 -.81546

.006713 -.75956

.004094 -.67643
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II. COEFFICIENT OF VARIATION CV A statistical measure of the dispersion of data points in a data series around the mean. It is calculated as follows: Coefficient of Variation = Standard Deviation Expected Return The coefficient of variation represents the ratio of the standard deviation to the mean, and it is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other. In the investing world, the coefficient of variation allows you to determine how much volatility (risk) you are assuming in comparison to the amount of return you can expect from your investment. In simple language, the lower the ratio of standard deviation to mean return, the better your risk-return tradeoff. With reference to Table No.1.2 Funds Benchm ark Co-effieients 3.344704 of variations
3.117695 2.560534 3.561133 5.915582

UTI

Kotak

Relience

Quantam

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III. ANALYSIS OF VARAINCE (ANOVA) The Analysis Of Variance, popularly known as the ANOVA test, can be used in cases where there are more than two groups. When we have only two samples we can use the t-test to compare the means of the samples but it might become unreliable in case of more than two samples. If we only compare two means, then the t-test (independent samples) will give the same results as the ANOVA. It is used to compare the means of more than two samples. This can be understood better with the help of an example. Benchmark gold ETF Quarter 07- 09 NAV UTI ETF Quarter 07- 09 NAV GOLD KOTAK GOLD ETF Quarter 07- 09 NAV Reliance GOLD ETF Quarter 07- 09 NAV Quantum gold ETF Quarter 07- 09 NAV

926.46 1

902.69 1

903.4

1064.11 1

1223.85

881.26 2

902.57 2

1016.3 2

1200.1

1244.05

3 4

981.55 3 1117.7 4

1015.2 3 1197.7 4

1200

1233.84 3 1198.03 4

1217.04 1270.61

1191.5 4

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1219.5 5

1209.2 5

1229.7 5

1239.76 5

1473.95

1232.5 6

1230.3 6

1258.3 6

1442.78 6

1443.8

1227.7 7

1254.8 7

1454.1 7

1411.16

1369.9 8

1450.5 8

1444

1465.6 9

1441.9 9

1497.2

10

1459.9 10

1495.3

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Step-1 : Variance Between Colum N(sample mean Sample N 10 9 8 7 6 mean 1188.202 1210.005 1243.844 1255.688 1312.223 Grand mean 1234.28 1234.28 1234.28 1234.28 1234.28 sample -46.078 -24.275 9.564 21.408 77.943 mean (sample mean - grand mean )
2

- grand mean

- grand mean ) 2 2123.182084 589.275625 91.470096 458.302464 6075.111249

21231.82084 5892.75625 823.230864 3208.117248 36450.66749 67606.5927

Variance between column =16901.64817 Step-2: variance within column s12 s22 s32 s42 s52 44294.02 46939.75 40151.62 17170.76 13342.98 10774.22108 11417.77703 8681.431351 2784.447568 1803.105405

Variance with in column= 35460.98243 Calculated value of F = = Variance between column Variance with in column 16901.6481 35460.9824
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Table Value of f for (4,126 ) degree of freedom & 5 % significance level is 2.45 approx Table Value of f for (4,126 ) degree of freedom & 1 % significance level is 3.32 approx calculated value of F= 0.476627 < Table value So hypothesis accepted

Which specifies that return from all the Gold exchange traded fund are same they bear no difference.

IV.

CORRELATION Matrix:

The study of correlation is of immense use in practical life. Correlation analysis contribute to the understanding of economic behavior , aids in locating the critically important variable on which other depend, may revel to the economist the connection by which distribution spread and suggest to him the paths through which stabilizing force may become effective. Correlation analysis is based on the relationship between two or more variables. The degree of relationship between the variable under consideration is measured through the correlation analysis. The measure of correlation called coefficient of correlation. It is also said to be a measure of covariance between two series. Coefficient of correlation (r) = Cov (X, Y) Sx Sy r = 0 , No relation between X and Y.
45

 r = 1 , Perfect positive linear relationship.

r = -1, Perfect negative linear relationship.

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Benchmark gold ETF benchmark gold mcx bse-100 nifty UTI Gold ETF UTI UTI gold mcx bse-100 nifty Kotak Gold ETF Kotak Kotak Gold Mcx bse-100 Nifty Reliance Gold ETF Reliance Reliance gold mcx bse-100 nifty 1 0.996905 -0.39414 -0.59054 -0.64952 gold 0.996905 1 -0.04762 -0.46899 -0.4467 mcx bsc100 nifty -0.39414 -0.59054 -0.64952 -0.04762 -0.46899 -0.4467 1 0.472066 0.561259 0.472066 1 0.97291 0.561259 0.97291 1 1 0.997627 -0.17965 -0.59646 -0.59162 gold 0.997627 1 -0.04762 -0.46899 -0.4467 mcx bsc100 nifty -0.17965 -0.59646 -0.59162 -0.04762 -0.46899 -0.4467 1 0.472066 0.561259 0.472066 1 0.97291 0.561259 0.97291 1 1 0.999735 -0.0564 -0.49742 -0.47768 gold mcx bsc100 nifty 0.999735 -0.0564 -0.49742 -0.47768 1 -0.04762 -0.46899 -0.4467 -0.04762 1 0.472066 0.561259 -0.46899 0.472066 1 0.97291 -0.4467 0.561259 0.97291 1 benchmark gold Mcx bsc100 nifty 1 0.99964 -0.03745 -0.46234 -0.43995 0.999647 1 -0.04762 -0.46899 -0.4467 -0.03745 -0.04762 1 0.472066 0.561259 -0.46234 -0.46899 0.472066 1 0.97291 -0.43995 -0.4467 0.561259 0.97291 1

Quantam Gold ETF Quantam gold mcx bsc100 nifty Quantam 1 0.9928832 -0.562012 -0.32219 -0.42889 gold 0.9928832 1 -0.04762 -0.46899 -0.4467 mcx -0.5620122 -0.04762 1 0.472066 0.561259 bse-100 -0.3221971 -0.46899 0.472066 1 0.97291 nifty -0.4288937 -0.4467 0.561259 0.97291 1 47

ANALYSIS
PRIMARY DATA: Sample Size 100 Sampling method: convenience sampling Collected by Questionnaire Parameters Awareness of Gold ETF Preference for Gold ETF Preference for physical gold Out of 100 sample 35 are aware 21 79

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49

RESULT AND CONCLUSION

Secondary Data analysis: From Table1.2 we have analyze that the average rate of return on investment of all Five gold exchange traded fund are following in the same range which shows that all funds giving more or less same return on investment. Skewness result shows that all five gold exchange traded fund having Negative skewness which means all are skew toward Left thus it is clear that the data point of Return on investment are less than the mean

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Bibliography
1. www.scribd.com 2. www.nseindia.com 3. www.bloomberg.com 4. www.bseindia.com

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