A Study on the prospects of Gold Equity Traded Fund in India

Dr. Sybila Pius Fernandez, Associate Professor, St. Xaviers College for Women, Aluva And Ms. Mallika Mathew, Faculty, Department of Management Studies, Toc H Institute of Science & Technology, Ernakulam

Introduction
Gold occupies a special place in the financial market. On one level, it's simply a commodity metal in wide use in various electrical industries, for dental fillings and for jewelry. However, for many centuries gold served as the universally recognized form of money. Gold coins could be issued by various countries, kingdoms and emperors. But they were always worth whatever they weighed. Coins of the same weight bought the same amount of good whether issued in Rome or China. It now has enormous emotional appeal. Many people believe it is the true store of monetary value. India is the worlds largest gold consumer market. In India, gold is seen a sign of security as well as sign of prosperity. Gold is considered as form of money and is considered as one of the foundation assets for an Indian household and a means to accumulate wealth. In 2009, India accounted for 15% of the gold global market. Over the past 10 years the value of gold demand in India has increased at an average of 13% per year outpacing the countrys real GDP, inflation and population by 6%, 8% and 12 % respectively. Gold Jewellery accounted for 75 % of the total Indian gold demand, the remainder being investment (23%) and decorative and industrial (2%). During first half of 2010,Indian net retail investment in gold increased by 264% to 93 tonnes. Net retail investment comprises individuals purchase of coins and bars. There is a growing interest in gold investment stimulated by high savings ratio (30% of total income of which10% is invested in gold) and the increasing gold investment opportunities available to Indian investors. Thanks to the current economic and political turmoil, gold is in demand as a store of value. It's gone from about $250 per ounce in 1999 to over $1100 in 2010. It generally goes up when the stock market goes down, down when the stock market goes up. People are more likely to buy gold when they perceive a lot of economic and political risk. But traditional ways of investing in gold carry risk and expense. You can buy gold coins, but in small amounts and they can be stolen. In large amounts they're hard to handle. Bullion needs to be stored in a secure area. Therefore, you must pay storage fees. You can invest in gold mining stocks, but you're exposed to company risk. That is, if that company is run poorly you can lose money even while the price of gold is increasing.

ETFs offer investors a way to profit from the rise of gold without taking possession of any of the metal or worrying about whether a particular mine will pan out or not.

Objectives of the study

1. 2. 3. 4. 5. To study the new product Gold ETF To study the competitive advantage of Gold ETF with respect to Physical Gold To study in detail about the Gold ETF launched in India. To study the returns from Gold ETF with that of SENSEX for the period understudy. To study the returns, investors may gain from Gold ETF considering the period of the study of three years.

History of GOLD ETF & launch of GOLD ETF in India Gold, according to CRISIL, is an asset class that can be considered by retail investors as part of their investment portfolio. Gold exchange traded funds (ETFs), which have been in existence for almost 4 years, are the simplest means for investors to take exposures to gold. Gold is generally considered to be a very safe investment. Typically, during times of economic instability, gold acts as an effective hedge against other investments. Further, gold has significantly lower correlation to other assets like equity, debt and other commodities. According to Tarun Bhatia, Director - Capital Markets, "The benefit of low correlation with other asset classes makes gold a useful asset for diversification and asset allocation. Further, while almost all asset classes depict cyclical movements, gold has consistently provided healthy returns." Moreover, gold has a positive correlation with inflation and can be considered a good hedge against inflation. Investments in gold, unlike other investments, typically yields a return higher than inflation - adjusted for inflation, gold has yielded positive returns over the last 3 years. Gold ETFs are a relatively new instrument. It was in 2003 when the first gold ETF was launched in Australian Stock Exchange in the name of Gold Bullion Securities. Then comes the ETF in London Stock Exchange, Euronext (European Stock Exchange based in Paris) now merged with NYSE. In US market it was launched under SPDR Gold Trust which was enlisted in NYSE, Tokyo Stock Exchange and Hongkong Stock Exchange. Then South Africa started its Gold ETF as New Gold Issuer under Johannesburg Stock Exchange. ETFs Gold was launched by ETF Securities and was enlisted in LSE. IShares COMEX Gold Trust was formed and was listed in NYSE followed by listing in Toronto Stock Exchange. ZKB Gold ETF was launched and was listed in Swiss Stock exchange. Finally Benchmark Asset Management Company Pvt Ltd Mumbai Based Launched GOLD ETF in March 2007. The launch of Benchmark Gold ETF was the beginning of ETF in Indian Market. Gold Exchange Traded Funds (ETFs) give retail investors the ideal opportunity to invest in gold without holding it physically. There has been a tremendous rise in interest in Gold ETFs with the retail investors over the last few years. Assets under management, or AUM, of Gold ETFs have been steadily growing. Table 1 shows that Gold ETFs had about Rs 32 crore as AUM as on March 31, 2008, which grew to Rs 736 crore by March 31, 2009. However, by March 31, 2010, the amount has nearly

doubled to Rs 1,590 crore. Latest Association of Mutual Funds in India data shows AUM for Gold ETFs as on September 30, 2010, at Rs 2,849 crore. Table 1: ASSETS UNDER MANAGEMENT AND FOLIOS - CATEGORY WISE AGGREGATE Period AUM (Rs.Cr) 30 September,2010 2849.76 31 March,2010 1590 30 September,2009 1008.43 Source: Amfi Total No. Folios 243973 147047 102573 of No. of Folios 235218 142270 99454 Retail % to total 96.41 96.75 96.96

The count of retail folios has more than doubled to 2.43 lakhs as of September 2010 from 1.02 lakhs folios as of September 2009. As per WGC, the tonnage of gold in Indian Gold ETFs remains relatively small but there have been significant recent developments with the Indian ETF market as investors seek greater access to more liquid gold investments. Total holdings have increased to approximately 11 tonnes by the end of August,2010, up by 250% on June 2007 from 3 tonnes.

What is Gold ETF?

Open-ended exchange traded, mutual fund scheme Scheme buys and holds gold on behalf of investors Scheme stores gold just like someone stores it in a bank locker Each scheme unit closely corresponds to 1 gram of gold One can buy any number of units (representing gold) on the stock exchange at current market price and sell at prevailing market price when prices rise

Structure of ETFs:

Figure 1 Source:http://www.nseindia.com/

Figure 1 depicts how GOLD ETF works. It is seen that retail/small Buyer /seller of ETF have no direct access to the Fund. They only can buy units and sell units through exchange. It is the big parties like Authorized participants /large Investors who actually are involved with creation /redemption of units in exchange of physical gold. They are also the intermediaries between AMC and National Stock Exchange. Custodian plays the same role as in case of security market regarding possessing physical gold. They deposit or sell Gold to the fund as per the demand which is then ready for conversion. Differences with Physical Gold Gold ETFs provide various benefits over holding physical gold including smaller lot size, guaranteed purity, demat issuance, liquidity and price transparency as well as tax advantages. We need to invest in huge amount for physical gold considering the present price of gold, whereas in Gold ETFs we can invest in small denomination, which makes it easier for the retail investor to participate. On the secondary market, the minimum lot is one unit. This enables the investor to accumulate units over time and reap the benefits of rupee cost averaging. The units can be redeemed either from the fund directly or from the market. Table 2 gives a summary of the differences between Gold ETF and Physical Gold. However, while investing in a Gold ETF, investors need to understand the risks involved such as tracking error and impact cost. (Tracking error is an estimate of the Gold ETF's ability to track the domestic gold prices as accurately as possible whereas impact cost is a measure of the volume of ETFs traded on the exchange.) Table 2 :Comparison of Gold ETF with Physical Gold Sl Parameter No 1 How Gold held 2 Pricing Jeweller is Physical (Bars / Coins) Bank Gold ETF Dematerialized (Electronic Form) Linked to International Gold Prices and very transparent. Likely to be less

Physical (Bars / Coins) Differs from one to Differs from bank another. Neither to bank. Not transparent nor Standard. Standard. Likely to be more Charges incurred Nil Locker / Safe

3 4 5 6 7 8

Buying Premium Likely to be more above gold price Making Charges Charges are incurred Impurity Risk High Storage Locker / Safe Requirement Security of Asset Investor is responsible Resale Conditional uneconomical

are No Charges are incurred Nil Demat Account

Investor is Fund House takes responsible the responsibility and Banks do not buy At Secondary back Market Prices

Convenience in Less convenient, as Gold Less convenient, as More convenient, Buying / Selling needs to be moved Gold needs to be as held in physically moved physically electronic form under the demat account 10 Bid Ask Spread Very High Cant Sell Back Very Low 11 Risk of Theft Yes, possible Yes, possible No, Not possible 12 Wealth Tax Yes Yes No 13 Long Term Only after 3 years Only after 3 years After 1 year Capital Gains Tax Source :http://www.equitybulls.com/mutualfunds/goldetf.asp Benefits of investor who invest in Gold ETFs: 1. No worry on adulteration 2. Gold provides diversification to the portfolio 3. Gold is considered as a Global Asset Class 4. Gold is used as a Hedge against Inflation 5. Gold is considered to be less volatile compared to equities 6. Held in Electronic Form 7. Store of value Advantages of Investing in Gold ETFs: 1. Potentially cheaper to have price exposure to gold price as compared to other available avenues 2. Quick and convenient dealing through demat account 3. No storage and security issue for investors 4. Transparent pricing 5. Taxation of Mutual Fund 6. Can be traded on stock exchange like buying / selling a stock 7. Ideal for retail investor as minimum lot size to trade is one unit on secondary market 8. NAV of a unit will track price of approximately or 1 gram of gold Existing Gold ETFs in India There are in all nine Gold ETFs in India .Only those Gold ETFs have been considered which have a 3 year track record. Table 3: List of existing Gold ETFs in India Name Expense Pricing Per Unit Ratio Benchmark Mutual Fund 1% Approximately 1 Gold Benchmark Exchange of gold Traded Scheme UTI Mutual Fund UTI 2.5% Approximately 1 Gold Exchange Traded Fund of gold Kotak Mutual Fund Gold 2.5% Approximately 1 Exchange Traded Fund of gold Reliance Mutual Fund 2.5% Approximately 1 Inception Date gram 08 March 2007 gram 3rd Jan 2007 gram 21st June 2007 gram 1st November

Gold Exchange Traded Fund Quantum Gold Fund 1.25% Exchange Traded Fund SBI Mutual Fund SBI Gold 2.50% ETF HDFC Mutual Fund 2.50% HGETF ICICI Prudential Mutual 2.50% Fund - ICICI Prudential Gold ETF Axis Mutual Fund - Axis Gold ETF Source :- http://www.onemint.com

of gold Approximately gram of gold Approximately of gold Approximately of gold Approximately of gold

2007 half a 27th February 2008 1 gram 30th March 2009 1 gram 23rd July,2010 1 gram 29th July,2010

Approximately 1 gram 3rd of gold November,2010

Methodology adopted
Sample taken for study 4 Gold ETF which have been launched in Indian Market and have a three year track record Sample period Three years ( 2008 -2010) Benchmark Index Sensex & Physical Gold prices Data Collected - NAV of respective funds are collected from the respective AMC site for the period taken for study per gram of Gold. Sensex values and Physical Gold Price collected from BSE and MCX . Tools used 1.Returns analysis. 2. Annova to test the difference of means of returns of the four Gold ETFs. Findings /analysis Table 4: Return Analysis Inception date Jan 2008 Jan 2009 Dec 2008 Dec 2009 Returns Returns% % 13.86 23.60 14.87 23.89 15.46 12.21 18.73 -52 23.07 23.46 21.75 66 Jan 2010 Dec 2010 Returns % 17.92 17.77 18.06 17.52 16.96 17.44 Average Returns % 18.46 18.85 18.87 17.73 19.15 10.31

Gold Bees Gold Share Kotak Gold Rel Gold Physical Gold Sensex

08th March 2007 3rd Jan 2007 21st June 2007 1st November 2007

It is seen from Table 4 that Average Returns for all the Funds ( 3 years - 2008 -2010) differs to some extent ranging from 17.73 % to 18.87%. They have all outperformed the Average Market Return ( 3 years -2008 - 2010 ), but Average Return with respect to Physical gold is a bit more with respect to all the funds average returns. Considering last 1 yr return (from Jan 10 Dec 10 ) return on all funds ( ranging from 17.52 % to 18.06 % ) are more or less same, and also more less the same as sensex return of 17.44 % but more than gold return of 16.96 %. ANNOVA to test the difference of means of returns of the four Gold ETF. Now with 4 funds in the market understudy, investor needs to know which fund they should invest in so that return is good and comparable to other funds. For this we have to know that whether Funds return varies in some way or the other. So the study is to test with the help of ANNOVA whether funds return varies or not. Hypothesis Null Hypothesis: 1= 2=3=4= 5 Alternate Hypothesis: 1 234 5 For calculating ANNOVA the Monthly NAV are been converted to Quarterly NAV by averaging method. NAV taken is given below. Table 5: NAVs of Gold ETFs

QUARTER GOLDBEES GOLDSHARE KOTAKGOLD 2008 -10 (Rs.) (Rs.) (Rs.) NAV 1199.505 1243.4475 1259.335 1458.6375 1467.02 1628.6475 1634.365 1815.1875 1943.9625 NAV 1191.32 1246.6175 1258.6525 1452.9625 1468.295 1631.1975 1634.4075 1800.25 1941.2875 NAV 1196.5425 1239.8925 1263.89 1457.7 1461.81 1625.9725 1633.33 1812.8375 1943.725

RELGOLD (Rs.) NAV 1193.4375 1230.2625 1238.855 1420.0475 1422.935 1580.935 1582.1825 1757.425 1885.3875

1 2 3 4 5 6 7 8 9

Findings /analysis There are 4 samples in total. Sample size for each Fund. Sample 1 - Benchmark Gold ETF ( n1 )= 9 Sample -2 -UTI Gold ETF ( n2 ) = 9 Sample -3 -Kotak Gold ETF (n3) = 9 Sample -4 -Reliance Gold ETF ( n4) = 9 Total items in the population is 36 For finding ANNOVA we have to Find Variance between columns & Variance within columns Table 6: Calculation of ANNOVA Sample mean Grand Mean -10.50 -7.71 -8.90 27.12 (Sample - mean Grand Mean) 2 110.35 59.50 79.28 735.61 N (Sample - mean Grand Mean) 2 993.12 535.52 713.49 6620.47 8862.59 2101270.812

N 9 9 9 9

Sample Mean 1516.68 1513.89 1515.08 1479.05

Grand Mean 1506.17 1506.17 1506.17 1506.17 SS between SS within

MS between MS within F Ratio = MS between / MS within = 2954.19/65664.71= .045

2954.197135 65664.71286

Table value of F test for (4-1, 36-4) = (3, 32) degree of freedom for 5 % significance level = 2.92 & for 1 % significance level = 4.51 Since Calculated value < table value for both significance level, Null Hypothesis is accepted.

So it is concluded that all funds give more or less same returns or there is no significant difference in their returns.

Conclusion
Gold is an important constituent of the investment portfolio of an Indian Household. People would prefer to buy Gold ETF in comparison to physical gold due to its many advantages. Considering the volatility in the Stock Market and the increase in the price of Gold, investors are likely to be diversify their risk by purchasing Gold ETF. It is found that in 2009, when the stock market revived, the return on sensex was more than ETF and Gold. In a falling market it is better to include Gold ETF in the portfolio. As per Indian Context, Gold ETF is still a new concept, but if awareness level is increased then it is going to be successful in the market. As Indian investors have a strong demand for Golden Jewellery, the acceptance level of Paper form of Gold will take time and is a big challenge. There are already nine funds existing in the market and we expect more to come. For an ordinary investor, it is crucial to decide whether to go for investment in physical gold or Gold ETF. As the returns from the Gold ETFs, for a particular period of time, are more or less same, which Gold ETF should the investor invest in? So for ordinary investors it is not so much problem to decide to which fund to invest in. But the problem is that if all the funds give more or less same return then how the competition is going to work among the AMCs. Also it is not clear whether the insignificant difference in returns between funds will stay for long or not. According to World Gold Council, India and Middle East, the Gold ETFs would soon start offering Systematic Investment Plans and the physical delivery of gold in smaller denominations. Sources indicate that efforts are on by the companies offering Gold ETFs, to tie up with the leading jewellers in India to help redeem the gold units in smaller denominations. For example, suppose if you now want to sell say, 90 units of a Gold ETF (90 units=90 grams of gold) you cannot get physical gold and will have to take the cash equivalent of 90 grams of gold. However, it may be possible in the near future that you can take the delivery of the physical gold through the pre-designated jeweller of any denomination in the form of a jewellery or coins/bars; you may have to shell out the making charges for the jewellery though. Experts believe that gold must form at least 15 to 20 per cent of your portfolio and Gold ETF is a good way to go about it. With possibility of option of SIP in Gold ETF in near future, the future of Gold ETF in India seems to be bright. References www.amfiindia.com
www.gold.org/.../India_heart_of_gold_Revival_10_Nov_2010.pdf

http://www.nse-india.com/content/products/prod_icicipru_gnfo.zip http://www.equitybulls.com/mutualfunds/goldetf.asp

https://www.crisilresearch.com/CuttingEdge/Content/Published/OTH/OTH%20PRL/Pb74337.pdf

www.benchmarkfunds.com www.reliancemutual.com www.utimf.com www.kotakmutual.com

http://news.in.msn.com/business/article.aspx?cp-documentid=4973760 http://www.nseindia.com/ www.ripublication.com/gjfm/gjfmv2n2_7.pdf