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 SIGNATURE

HEAD OF THE DEPARTMENT FACULTY IN CHARGE

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 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.

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 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 Introduction 5

2 Objective 11
3 Gold ETF in India 12
4 Creation and Redemption 27
5 Structure of ETF 30
6 Comparison 36
7 Research Methodology 37
8 Analysis 48
9 Result and Conclusion 50
10 Bibliography 51

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 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 ½ 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.

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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 high-
profile 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
7
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
government’s 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.

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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

12
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 Issue Close 16-Mar-2009

Scheme Objective

Mutual Fund Family UTI Asset Mgmt Company Pvt. Ltd.

Fund Class Gold

Fund Type Open-Ended

Investment plan Dividend

Fund Manager Swati Kulkarni

Entry Load 0.00 %

Exit Load 0.00 %

Comment 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

14
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 isn’t to say that I don’t 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 Issue Close 08-Aug-2009

Scheme Objective

Mutual Fund Family Kotak mahindra Asset Mgmt Company

Pvt. Ltd.

Fund Class Gold

Fund Type Open-Ended

Investment plan Dividend

Fund Manager Mr. Abhishek Bisen

Entry Load 0.00 %

Exit Load 0.00 %

Comment 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
16
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 fund’s 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 scheme’s 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 - 1.50%

Rs. 1 lacs & less than Rs. 25 lacs 0.75%

Rs. 25 lacs & less than Rs. 50 lacs 0.50%

Rs. 25 lacs & less than Rs. 1 crs 0.25%

Rs 50 lacs & less than Rs 1cr 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

20
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, cost-
efficient 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 (½) 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

21
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 ½ 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

22
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 Rs 5,000 (multiples of 1000)

Minimum target amount during initial offer period Rs. 10 Lacs

Face value per unit Rs. 100/-

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Entry and Exit Load structure

Entry Load Entry Load Nil

Exit Load Authorized Participants Nil

Exit Load Eligible Investors 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.

24
 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
25
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.

26
 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

27
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.

28
• 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.

29
Structure of ETFs

30
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)

31
 • 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 world’s 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 Company’s

32
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 Zürcher 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 Jewelers Bank Gold ETF

How Gold is Physical (Bars / Physical (Bars / Dematerialized (Electronic
held Coins) Coins) Form)
Differs from one to
Differs from bank
another. Neither Linked to International Gold
Pricing to bank. Not
transparent nor Prices and very transparent.
Standard.
standard.
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 ½ or 1 gram
standard standard
Buy / Sell according to the fund
denomination denomination
Bid Ask
Very High Can’t 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 Benchmark UTI Kotak Reliance Quantam

NAV NAV NAV NAV NAV
Mar-07 945.4541
Apr-07 940.4872 937.3458
May-07 893.4265 893.6763
Jun-07 876.1564 877.0542
Jul-07 880.3478 881.2746 882.3436
Aug-07 887.2831 888.6244 889.5782
Sep-07 935.7657 937.8366 938.2891
Oct-07 973.0185 974.4634 975.7427
Nov-07 1035.861 1037.613 1038.926 1041.069
Dec-07 1031.232 1033.43 1034.26 1027.807
Jan-08 1131.715 1133.995 1135.073 1123.458
Feb-08 1190.288 1192.831 1193.836 1179.419 1236.447
Mar-08 1267.401 1266.205 1270.998 1254.922 1259.423
Apr-08 1179.574 1180.68 1182.541 1165.983 1175.705
May-08 1211.464 1214.134 1158.586 1198.634 1208.373
Jun-08 1230.128 1232.896 1233.496 1216.781 1226.84
Jul-08 1300.312 1303.126 1303.705 1286.13 1296.946
Aug-08 1167.096 1169.524 1173.577 1152.213 1163.65
Sep-08 1215.513 1218.141 1211.857 1198.67 1217.317
Oct-08 1276.098 1272.639 1282.453 1243.208 1270.181
Nov-08 1191.37 1203.437 1203.887 1174.442 1186.89
Dec-08 1285.379 1288.289 1288.67 1233.083 1285.355
Jan-09 1342.77 1339.655 1346.147 1311.78 1339.609
Feb-09 1481.607 1487.818 1490.018 1448.862 1476.716
Mar-09 1522.739 1523.885 1526.056 1483.273 1516.569
Apr-09 1433.229 1434.158 1437.899 1396.233 1428.574
May-09 1440.682 1442.595 1444.074 1404.696 1436.832
Jun-09 1446.332 1449.078 1450.091 1410.565 1443.234
Jul-09 1454.058 1457.173 1457.491 1418.224 1451.348

39
 TABLE – 1.2
Return on Gold Exchange traded fund
Month Benchmark UTI Kotak Reliance Quantam
Apr-07 -0.00229
May-07 -0.02229 -0.02072
Jun-07 -0.00848 -0.00815
Jul-07 0.002073 0.002085
Aug-07 0.003408 0.003607 0.003546
Sep-07 0.023105 0.023409 0.023153
Oct-07 0.016954 0.016638 0.016999
Nov-07 0.02718 0.02727 0.027249
Dec-07 -0.00195 -0.00175 -0.00195 -0.00557
Jan-08 0.040381 0.04033 0.040394 0.038645
Feb-08 0.021915 0.021968 0.021921 0.021111
Mar-08 0.027262 0.025925 0.0272 0.026949 0.007996
Apr-08 -0.03119 -0.03037 -0.03133 -0.03192 -0.02987
May-08 0.011585 0.012134 -0.00889 0.011994 0.011903
Jun-08 0.00664 0.00666 0.027209 0.006526 0.006587
Jul-08 0.024097 0.02406 0.024042 0.024073 0.024134
Aug-08 -0.04694 -0.04698 -0.04567 -0.04775 -0.0471
Sep-08 0.017653 0.017689 0.01394 0.017167 0.019581
Oct-08 0.021125 0.019008 0.02459 0.015844 0.018462
Nov-08 -0.02984 -0.02428 -0.02746 -0.02471 -0.02945
Dec-08 0.032984 0.02959 0.029556 0.021161 0.034612
Jan-09 0.018971 0.01698 0.018951 0.026869 0.017955
Feb-09 0.042731 0.045557 0.044099 0.043166 0.042319
Mar-09 0.011892 0.010403 0.010379 0.010194 0.011565
Apr-09 -0.02631 -0.02636 -0.02584 -0.02626 -0.02596
May-09 0.002253 0.002548 0.001861 0.002625 0.002503
Jun-09 0.0017 0.001947 0.001806 0.001811 0.001931
Jul-09 0.002314 0.002419 0.002211 0.002352 0.002435

Mean .006676 .007097 .009082 .006713 .004094

Skewness -.64859 -.064454 -.81546 -.75956 -.67643
40
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 UTI Kotak Relience Quantam

ark
Co-effieients 3.344704 3.117695 2.560534 3.561133 5.915582

of variations

41
 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 UTI GOLD KOTAK Reliance Quantum

gold ETF ETF GOLD ETF GOLD ETF gold ETF
Quarter Quarter Quarter Quarter Quarter
07- 09 NAV 07- 09 NAV 07- 09 NAV 07- 09 NAV 07- 09 NAV

1 926.46 1 902.69 1 903.4 1 1064.11 1 1223.85

2 881.26 2 902.57 2 1016.3 2 1200.1 2 1244.05

3 981.55 3 1015.2 3 1200 3 1233.84 3 1217.04

4 1117.7 4 1197.7 4 1191.5 4 1198.03 4 1270.61

42
5 1219.5 5 1209.2 5 1229.7 5 1239.76 5 1473.95

6 1232.5 6 1230.3 6 1258.3 6 1442.78 6 1443.8

7 1227.7 7 1254.8 7 1454.1 7 1411.16

8 1369.9 8 1450.5 8 1444

9 1465.6 9 1441.9 9 1497.2

10 1459.9 10 1495.3

43
 Step-1 : Variance Between Colum

N(sample
mean
Sample Grand sample mean (sample mean - grand mean )
N mean mean - grand mean - grand mean ) 2 2

10 1188.202 1234.28 -46.078 2123.182084 21231.82084

9 1210.005 1234.28 -24.275 589.275625 5892.75625
8 1243.844 1234.28 9.564 91.470096 823.230864
7 1255.688 1234.28 21.408 458.302464 3208.117248
6 1312.223 1234.28 77.943 6075.111249 36450.66749
67606.5927
Variance between column =16901.64817
Step-2: variance within column
s12 44294.02 10774.22108
s22 46939.75 11417.77703
s32 40151.62 8681.431351
s42 17170.76 2784.447568
s52 13342.98 1803.105405

Variance with in column= 35460.98243

Calculated value of F = Variance between column

Variance with in column
= 16901.6481
35460.9824
44
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.

46
 Benchmark gold ETF
benchmark gold Mcx bsc100 nifty
benchmark 1 0.99964 -0.03745 -0.46234 -0.43995
gold 0.999647 1 -0.04762 -0.46899 -0.4467
mcx -0.03745 -0.04762 1 0.472066 0.561259
bse-100 -0.46234 -0.46899 0.472066 1 0.97291
nifty -0.43995 -0.4467 0.561259 0.97291 1

UTI Gold ETF

UTI gold mcx bsc100 nifty
UTI 1 0.999735 -0.0564 -0.49742 -0.47768
gold 0.999735 1 -0.04762 -0.46899 -0.4467
mcx -0.0564 -0.04762 1 0.472066 0.561259
bse-100 -0.49742 -0.46899 0.472066 1 0.97291
nifty -0.47768 -0.4467 0.561259 0.97291 1

Kotak Gold ETF

Kotak gold mcx bsc100 nifty
Kotak 1 0.997627 -0.17965 -0.59646 -0.59162
Gold 0.997627 1 -0.04762 -0.46899 -0.4467
Mcx -0.17965 -0.04762 1 0.472066 0.561259
bse-100 -0.59646 -0.46899 0.472066 1 0.97291
Nifty -0.59162 -0.4467 0.561259 0.97291 1

Reliance Gold ETF

Reliance gold mcx bsc100 nifty
Reliance 1 0.996905 -0.39414 -0.59054 -0.64952
gold 0.996905 1 -0.04762 -0.46899 -0.4467
mcx -0.39414 -0.04762 1 0.472066 0.561259
bse-100 -0.59054 -0.46899 0.472066 1 0.97291
nifty -0.64952 -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 Out of 100 sample

Awareness of Gold ETF 35 are aware
Preference for Gold ETF 21
Preference for physical gold 79

48
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

50
 Bibliography

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

51