BACKGROUND OF STOCK EXCHANGE IN INDIA

The emergence of stock market can be traced back to 1830. In Bombay, business passed in the shares of banks like the commercial bank, the chartered mercantile bank, the chartered bank, the oriental bank and the old bank of Bombay and shares of cotton presses. In Calcutta, Englishman reported the quotations of 4%, 5%, and 6% loans of East India Company as well as the shares of the bank of Bengal in 1836. This list was a further broadened in 1839 when the Calcutta newspaper printed the quotations of banks like union bank and Agra bank. It also quoted the prices of business ventures like the Bengal bonded warehouse, the Docking Company and the storm tug company.

Between 1840 and 1850, only half a dozen brokers existed for the limited business. But during the share mania of 1860-65, the number of brokers increased considerably. By 1860, the number of brokers was about 60 and during the exciting period of the American Civil war, their number increased to about 200 to 250. The end of American Civil war brought disillusionment and many failures and the brokers decreased in number and prosperity. It was in those troublesome times between 1868 and 1875 that brokers organized an informal association and finally as recited in the Indenture constituting the Articles of Association of the Exchange. On or about 9th day of July,1875, a few native brokers doing brokerage business in shares and stocks resolved upon forming in Bombay an association for protecting the character, status and interest of native share and stock brokers and providing a hall or building for the use of the members of such association.

As a meeting held in the broker Hall on the 5th day of February, 1887, it was resolved to execute a formal deal of association and to constitute the first managing committee and to appoint the first trustees. Accordingly, the Articles of Association of the Exchange and the Stock Exchange was formally established in Bombay on 3rd day of December, 1887. The Association is now known as The Stock Exchange.

The entrance fee for new member was Re.1 and there were 318 members on the list, when the exchange was constituted. The numbers of members increased to 333 in 1896, 362 in 1916and 478 in 1920 and the entrance fee was raised to Rs.5 in 1877, Rs.1000 in 1896, Rs.2500 in 1916 and Rs. 48,000 in 1920. At present there are 23 recognized stock exchanges with about 6000 stock brokers. Organization structure of stock exchange varies. 14 stock exchanges are organized as public limited companies, 6 as companies limited by guarantee and 3 are non-profit voluntary organization. Of the total of 23, only 9 stock exchanges have been permanent recognition. Others have to seek recognition on annual basis.

These exchange do not work of its own, rather, these are run by some persons and with the help of some persons and institution. All these are down as functionaries on stock exchange. These are 1. Stockbrokers 2. sub-broker 3. market makers 4. Portfolio consultants etc.

1.) Stockbrokers Stock brokers are the members of stock exchanges. These are the persons who buy, sell or deal in securities. A certificate of registration from SEBI is mandatory to act as a broker. SEBI can impose certain conditions while granting the certificate of registrations. It is obligatory for the person to abide by the rules, regulations and the buy-law. Stock brokers are commission broker, floor broker, arbitrageur etc.

Detail of registered brokers Total no. of registered brokers as Total no. of sub-brokers as on on 31.03.2008 31.03.2008

9000

24,000

2.) Sub-broker A sub-broker acts as agent of stock broker. He is not a member of a stock exchange. He assists the investors in buying, selling or dealing in securities through stockbroker. The broker and sub-broker should enter into an agreement in which obligations of both should be specified. Sub-broker must be registered SEBI for a dealing in securities. For getting registered with SEBI, he must fulfill certain rules and regulation.

3.) Market Makers Market maker is a designated specialist in the specified securities. They make both bid and offer at the same time. A market maker has to abide by bye-laws, rules regulations of the concerned stock exchange. He is exempt from the margin requirements. As per the listing requirements, a company where the paid-up capital is Rs. 3 crore but not more than Rs. 5 crore and having a commercial operation for less than 2 years should appoint a market maker at the time of issue of securities.

4.) Portfolio consultants

A combination of securities such as stocks, bonds and money market instruments is collectively called as portfolio. Whereas the portfolio consultants are the persons, firms or companies who advise, direct or undertake the management or administration of securities or funds on behalf of their clients.

Partial fulfillment for degree of M.B.A. programmed, we received the opportunity from INDIANINFOLINE Ltd. for our summer training project report. It is basically a stock

brokering company which deals in security and derivative market, Commodity market, ETFs and Insurance etc.

The Role Of Stock Exchanges

Stock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing
Both casual and professional stock investors, through dividends and stock price Increases that may result in capital gains, will share in the wealth of profitable Businesses.

Introduction of company
India Infoline.com Securities Pvt. Ltd. is a wholly owned subsidiary of India Infoline.com Ltd and is the stock broking arm of India Infoline.com. The subsidiary was formed to comply with regulatory guidelines. www.5paisa.com is a focused website for online stock market trading. 5paisa.com is a trade name owned by the India Infoline.com group. IILSPL has applied for trading membership of the BSE under Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules 1992. IILSPL is in the business of providing broking services online via the Internet ("E-broking Services") and has been permitted by the NSE by way of registration permission no: NSEIL/CMO/INET/1103/2000 dated 03/July/2000, and will be applying for permission to the BSE, to provide E-broking Services to its clients. IILSPL is a TRADING MEMBER of the National Stock Exchange of India. The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of Indias premier providers of financial services. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other small savings instruments. We have a presence in: Equities our core offering, gives us a leading market share in both retail and institutional segments. Over a million retail customers rely on our research, as do leading FIIs and MFs that invest billions. Private Wealth Management services cater to over 2500 families who have trusted us with close to Rs 25,000 crores ($ 5bn) of assets for advice. Investment Banking services are for corporates looking to raise capital. Our forte is Equity Capital Markets, where we have executed several marquee transactions. Credit & Finance focuses on secured mortgages and consumer loans. Our high quality loan book of over Rs. 6,200 crores ($ 1.2bn) is backed by strong capital adequacy of approximately 20%.

IIFL Mutual Fund made an impressive beginning in FY12, with lowest charge Nifty ETF. Other products include Fixed Maturity Plans. Life Insurance, Pension and other Financial Products, on open architecture complete our product suite to help customers build a balanced portfolio. IIFL has received membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. IIFL owns and manages the website,www.indiainfoline.com, which is one of Indias leading online destinations for personal finance, stock markets, economy and business. IIFL has been awarded the Best Broker, India by Finance Asia and the Most improved brokerage, India in theAsia Money polls. India Infoline was also adjudged as Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. Our research is available not just over the Internet but also on international wire services like Bloomberg, Thomson First Call and Internet Securities besides others where it is amongst one of the most read Indian brokers. IIFL is a listed company with a consolidated group networth of about Rs 1,800 crores. The income and net profit during FY2010-11 were Rs. 14.7 bn and Rs. 2.1 bn respectively. The Group has a consistent and uninterrupted track record of profits and dividends since its listing in 2005. The company is listed on both Exchanges and also trades in the derivatives segment. IIFLs Crisil and ICRA Rating for short term is top rated as CRISIL A1+ and ICRA (A1+) respectively. For long term, IIFL has been rated ICRA(AA-) by ICRA and CRISIL AA-/Stable by CRISIL indicating high degree of safety for timely servicing of financial obligations. IIFL is present in every nook and cranny of the country, with over 3,000 business locations across 500 cities in India. You can reach us in a variety of ways, online, over the phone and through our branches. All our offices are connected with the corporate office in Mumbai with cutting edge networking technology. The group caters to a customer base of about a million customers. Our physical presence in key global markets includes subsidiaries in Colombo, Dubai, New York, Mauritius, London, Singapore and Hong Kong. IIFL/India Infoline refer to India Infoline Ltd and its subsidiaries/ group companies.

HISTORY & MILESTONES

2011 Launched IIFL Mutual Fund. 2010 Received in-principle approval for membership of the Singapore Stock Exchange Received membership of the Colombo Stock Exchange 2009 Acquired registration for Housing Finance SEBI in-principle approval for Mutual Fund Obtained Venture Capital license 2008 Launched IIFL Wealth Transitioned to insurance broking model 2007 Commenced institutional equities business under IIFL Formed Singapore subsidiary, IIFL (Asia) Pte Ltd 2006 Acquired membership of DGCX Commenced the lending business 2005 Maiden IPO and listed on NSE, BSE 2004 Acquired commodities broking license Launched Portfolio Management Service 2003 Launched proprietary trading platform Trader Terminal for retail customers

2000 Launched online trading through www.5paisa.com Started distribution of life insurance and mutual fund 1999 Launched www.indiainfoline.com 1997 Launched research products of leading Indian companies, key sectors and the economy Client included leading FIIs, banks and companies. 1995 Commenced operations as an Equity Research firm

CORPORATE STRUCTURE OF IIFL

PRODUCT OFFERED BY IILSPL

Stock market:-IILSPL deals in stock market by trading in equity and derivatives. Personal finance:- It Deals In Mutual Fund And Insurance. Online Trading :- It provides services in stock and commodity trading (through Internet).

COMPARISON TABLE OF BROKERAGE CHARGES IN INDIA

Here you will find a table comparing intraday brokerage charges and delivery brokerage charges charged by different online brokers in India :
Online Broker SBICAP Securities brokerage charges Sharekhan brokerage charges Motilal Oswal brokerage charges 5 paisa brokerage charges Angel Broking brokerage charges ICICI direct brokerage charges Indiabulls brokerage charges HDFC Securities brokerage charges UTI Securities brokerage charges Religare brokerage charges Reliance Money brokerage charges Geogit brokerage charges Indiainfoline brokerage charges Brokerage for Delivery 0.50% Brokerage for Intraday trading 0.10% MMC*

NIL

0.03% - 0.50%

0.03% - 0.10%

NIL

0.30% - 0.50%

0.03% - 0.15%

0.25% - 0.85%

0.07%

0.50%

0.02% - 0.03%

0.75%

0.15%

0.25% - 0.50%

0.05% - 0.10%

0.50%

0.15%

0.80%

0.15%

0.20% - 0.30%

0.02% - 0.03%

0.01% 0.30%

0.01% 0.03%

card system

0.50%

0.10%

MMC=Minimum monthly commitment.

SCHEDULE OF BROKERAGE AND OTHER CHARGES-CURRENCY SEGMENT

CURRENCY SEGMENT

BROKERAGE

STANDARD RATE

QUOTED RATE

Brokerage futures

Rs. 25 per lot

Brokerage options

Rs. 10 per lot

OTHER CHARGES

STAMP DUTY Service Tax

- As applicable Rs. 200/- per Crore - As applicable 10.30%

Regulatory Charges Rs. 10/- Per 1 Crore

Introduction
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are the most popular type of exchange-traded product. Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund manager, and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates to the net asset value of the underlying assets.Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market. An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs. 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.

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 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, I SHARES 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.

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty. The ETFs trading value is based on the net asset value of the underlying stocks that it represents.

History
ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States.[10] A similar product, Toronto Index Participation Shares, started trading on the Toronto Stock Exchange in 1990. The shares, which tracked the TSE 35 and later the TSE 100 stocks, proved to be popular. The popularity of these products led the American Stock Exchange to try to develop something that would satisfy SEC regulation in the United States.[10] Nathan Most and Steven Bloom, executives with the exchange, designed and developed Standard & Poor's Depositary Receipts (NYSE: SPY), which were introduced in January 1993. Known as SPDRs or "Spiders", the fund became the largest ETF in the world. In May 1995 they introduced the Mid Cap SPDRs (NYSE: MDY). Barclays Global Investors, a subsidiary of Barclays plc, entered the fray in 1996 with World Equity Benchmark Shares, or WEBS, subsequently renamed iShares MSCI Index Fund Shares. WEBS tracked MSCI country indices, originally 17, of the funds' index provider, Morgan Stanley. WEBS were particularly innovative because they gave casual investors easy access to foreign markets. While SPDRs were organized as unit investment trusts, WEBS were set up as a mutual fund, the first of their kind. In 1998, State Street Global Advisors introduced the "Sector Spiders", which follow the nine sectors of the S&P 500.[15] Also in 1998, the "Dow Diamonds" (NYSE: DIA) were introduced, tracking the famous Dow Jones Industrial Average. In 1999, the influential "cubes" (NASDAQ: QQQQ) were launched attempting to replicate the movement of theNASDAQ-100. In 2000 Barclays Global Investors put a significant effort behind the ETF marketplace, with a strong emphasis on education and distribution to reach long-term investors. Their Shares line was launched in early 2000. Within 5 years I Shares had surpassed the assets of any other ETF competitor in the U.S. and Europe. Barclays Global Investors was sold to Black Rock in 2009. The Vanguard Group entered the market in 2001.

Since then ETFs have proliferated, tailored to an increasingly specific array of regions, sectors, commodities, bonds, futures, and other asset classes. As of September 2010, there were 916 ETFs in the U.S., with $882 billion in assets, an increase of $189 billion over the previous twelve months.

STRUCTURE
ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks, varying in size by ETF from 25,000 to 200,000 shares, called "creation units". Purchases and redemptions of the creation units generally are in kind, with the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF, although some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all of the securities in the basket of assets. The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit, and the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals. If there is strong investor demand for an ETF, its share price will (temporarily) rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component ETF shares in the open market. The additional supply of ETF shares reduces the market price per share, generally eliminating the premium over net asset value. A similar process applies when there is weak demand for an ETF and its shares trade at a discount from net asset value. In the United States, most ETFs are structured as open-end management investment companies (the same structure used by mutual funds and money market funds), although a few ETFs, including some of the largest ones, are structured as unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and are not prohibited from participating in securities lending programs or from using futures and options in achieving their investment objectives.

Under existing regulations, a new ETF must receive an order from the Securities and Exchange Commission, or SEC, giving it relief from provisions of the Investment Company Act of 1940 that would not otherwise allow the ETF structure. In 2008, however, the SEC proposed rules that would allow the creation of ETFs without the need for exemptive orders. Under the SEC proposal, an ETF would be defined as a registered open-end management investment company that:

Issues (or redeems) creation units in exchange for the deposit (or delivery) of basket assets the current value of which is disseminated per share by a national securities exchange at regular intervals during the trading day;

Identifies itself as an ETF in any sales literature; Issues shares that are approved for listing and trading on a securities exchange; Discloses each business day on its publicly available web site the prior business day's net asset value and closing market price of the fund's shares, and the premium or discount of the closing market price against the net asset value of the fund's shares as a percentage of net asset value; and

Either is an index fund, or discloses each business day on its publicly available web site the identities and weighting of the component securities and other assets held by the fund.

The SEC rule proposal would allow ETFs either to be index funds or to be fully transparent actively managed funds. Historically, all ETFs in the United States have been index funds. In 2008, however, the SEC began issuing exemptive orders to fully transparent actively managed ETFs. The first such order was to Power Shares Actively Managed Exchange-Traded Fund Trust,[6] and the first actively managed ETF in the United States was the Bear Stearns Current Yield Fund, a short-term income fund that began trading on the American Stock Exchange under the symbol YYY on 25 March 2008. The SEC rule proposal indicates that the SEC may still consider future applications for exemptive orders for actively managed ETFs that do not satisfy the proposed rule's transparency requirements. Some ETFs invest primarily in commodities or commodity-based instruments, such as crude oil and precious metals. Although these commodity ETFs are similar in practice to ETFs that invest in securities, they are not "investment companies" under the Investment Company Act of 1940.

Publicly traded grantor trusts, such as Merrill Lynch's HOLDRs securities, are sometimes considered to be ETFs, although they lack many of the characteristics of other ETFs. Investors in a grantor trust have a direct interest in the underlying basket of securities, which does not change except to reflect corporate actions such as stock splits and mergers. Funds of this type are not "investment companies" under the Investment Company Act of 1940. As of 2009, there were approximately 1,500 exchange-traded funds traded on US exchanges. This count uses the wider definition of ETF, including HOLDRs and closed-end funds.

STRUCTURE OF ETFs

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 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.

Index Funds Vs. ETFs

In much of the previous discussion comparing mutual funds to ETFs, the merits of actively managed mutual funds are compared to the passively managed ETFs. In some ways, it is like comparing apple to oranges. They have entirely different characteristics. If a passive approach is desired, an investor should then consider how best to implement it - by using index funds or exchange traded funds. Index Funds and ETFs Index funds have been available in the U.S. since the 1970s; ETFs were first traded in the U.S. in 1993. Although the number of index funds and ETFs are close, ETFs cover about five times as many indexes. Some of the newer ETFs track some indexes that are more appropriate for an ETF structure than for an index fund. Consequently, an investor might only be able to track an index by using ETFs because there are no index funds available that can track that same index Costs ETFs and index funds each offer advantages and disadvantages for managing the costs of the underlying assets. In some cases, the difference in fees might favor one over the other. Investors can buy no-load index funds without incurring any transaction costs. Investors buying ETFs will have to pay brokerage commissions. Tax Efficiency In nearly all cases, the structure of an ETF results in lower taxes versus the equivalent index fund. This is because the way in which ETFs are created and redeemed eliminates the need to sell securities. With index funds, securities are bought and sold, although with lower turnover than a typical actively managed fund. These transaction will trigger capital gains that have to be distributed to the unit holders. (To learn more, read An Inside Look At ETF Construction.) Dividends The nature of ETFs requires them to accumulate dividends or interest received from the underlying securities until it is distributed to shareholders at the end of each quarter. Index funds invest their dividends or interest income immediately. (For more insight, read Advantages Of Exchange-Traded Funds.) Rebalancing An investor with a portfolio of index funds or ETFs occasionally rebalances the portfolio, selling some of the positions and purchasing others. A portfolio containing ETFs incurs commissions by buying and selling the ETFs. Because the investor typically trades in board lots, getting the exact weightings of each ETF desired is practically impossible. This is

especially true for small portfolios. With index funds, an investor can achieve because the investor can purchase fractional units. No-load funds have no transaction costs. (For more on this topic, read Rebalance Your Portfolio To Stay On Track.) Dollar-Cost Averaging The technique of using ETFs for dollar-cost averaging - spending a fixed dollar amount at regular intervals on a portfolio - is generally impractical. The commission costs and the extra cost involved in buying odd-lot shares makes this strategy very expensive to implement. Mutual funds are a more suitable investment vehicle for dollar-cost averaging. Liquidity A lack of liquidity on some ETFs, resulting in an increase in the bid-ask spread, adds to the cost of trading ETFs. Also, the less popular ETFs are not likely to have the same arbitrage interest of other ETFs, resulting in a potentially larger difference between market prices and net asset value (NAV). Investors in index funds can always get the NAV at the end of the day.

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 breakup 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 28 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.

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.

Investment Uses
ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as limit orders,short selling, and options. Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies.[5Among the advantages of ETFs are the following:

Lower costs ETFs generally have lower costs than other investment products because most ETFs are not actively managed and because ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees.

Buying and selling flexibility ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.

Tax efficiency ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.

Market exposure and diversification ETFs provide an economical way to rebalance portfolio allocations and to "equitize" cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.

Transparency ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.

ETF Investment Strategies

ETFs provide considerable flexibility in implementing various investment strategies or building investment portfolios. Strategies range from very simple, such as diversifying an existing portfolio, to sophisticated hedging strategies. Core Holding An investor can consider using a few ETFs as core portfolio holdings. A low-cost diversified portfolio can easily be constructed with a few ETFs to cover the major equity asset classes and the fixed-income market. From that starting point, the investor can customize a portfolio with additional securities, mutual funds or other ETFs. (To learn more, read 10 Reasons To Make ETFs The Core Of Your Portfolio.) Asset Allocation With ETFs, building a portfolio for any asset allocation strategy is easy. It is even possible to buy an ETF that is already diversified across different asset classes. An investor can take a passive approach to asset allocation by rebalancing the portfolio only to ensure it returns back to the long-term or strategic asset mix. Alternatively, the investor can take an active role in asset allocation, by tactically rebalancing the portfolio, overweighting those asset classes that are expected to outperform in the shorter term and underweighting the others. (For more on strategies, read Asset Allocation Strategies.) Diversification ETFs allow the investor not only to diversify across all the major asset classes, such as U.S. equity , foreign equity and fixed income, but also to diversify into investments that have a low correlation to the major asset classes. This includes areas like commodities, real estate, emerging markets, small cap stocks, and others. (For more insight, read Introduction To Diversification.) Hedging The use of ETFs allows for a variety of hedging strategies. Investors who want to hedge against a drop in the market can purchase inverse ETFs or leveraged inverse ETFs, which rise when the market falls. An investor concerned about inflation can hedge it by investing in commodities or inflation-protected bond ETFs. Investors that have investments out side the U.S. can hedge their foreign currency exposure with currency ETFs. Of course, investors can short an appropriate ETF that can hedge against a very specific stock market exposure. Many ETFs have options that can be used for other

hedging strategies, either separately or in conjunction with the underlying ETF. (To learn more, check out A Beginner's Guide To Hedging.) Cash Management ETFs can be used to "equitize" cash, allowing investors an easy way to put their money in the stock market until a long-term investment decision is made. In this way, investors can ensure they do not miss out on price rises or forego income while their money is parked temporarily. Tax-Loss Harvesting Tax-loss harvesting is a strategy of realizing capital losses in a taxable account, and then redeploying the sale proceeds among similar investments, leaving the investor's portfolio largely unchanged. The wash-sale rule prevents an investor from selling a security at a loss and then immediately repurchasing it by disallowing the purchase of "substantially identical" securities within 30 days of a sale. With the availability of a wide variety of ETFs, buying an ETF that is very similar to the fund or stock being sold is easy. The end result is a portfolio that closely resembles the one before the capital losses were realized without invoking the wash-sale rule. (For more on this strategy, see Selling Losing Securities For A Tax Advantage.) Completion Strategies An investor might want to quickly gain exposure to specific sectors, styles or asset classes without having to obtain the prerequisite expertise in these areas. As an example, an investor who has no expertise in emerging markets can buy an ETF based on an emerging market index. Using ETFs allows an investor to easily fill the "holes" in his or her portfolio. Portfolio Transitions Many investors move portfolio assets between different advisors, managers or funds. In the transition period, the assets might be allowed to sit idle in cash. ETFs allow investors to keep their assets invested rather than having them dormant.

GOLD ETFs

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 6 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 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 FERA1947) relating to gold were also repealed in 1993. The FERA treated gold and 8 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 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.

Objectives of the Study

To provide an insight into the concept of ETF and to study the benefits of investing in them.

To ascertain the difference between ETFs and Mutual Funds. To conduct a primary study to find out the awareness of the ETF among investors and to ascertain the investment behavior relating to ETF and other investment options in India.

Source of Data Collection

PRIMARY DATA: The primary data was collected from the sample through sample survey with the help of questionnaire analysis. SECONDARY DATA: The secondary data was collected through the National Stock Exchange website (http://www.nseindia.com) database.

Research Methodology
RESEARCH DESIGN: Descriptive Research

SAMPLING FRAMEWORK
SAMPLING DESIGN: Convenience sampling SAMPLE SIZE: 50 Respondents

LIMITATIONS OF THE STUDY The survey mainly includes the salaried service class people which could lead to results being more biased towards them as compared to business men. The sample size is small as compared to the number of investors present in India does not include investors of other geographical areas.

ANANLYSIS & INTERPRETATION

Investment Patterns: Respondent Category
13% 38% 62% Trader Investor 41% 3 to 5 years

Investment Horizon
8% 38% Less than 1 year 1 to 3 years

Investing Since
10% 19% 40% 31% Less than 1 year 1 to 3 years 51% 3 to 5 years More than 5 years

Trading Horizon
4% 6% 13% Intra day Daily 26% Weekly Monthly Quarterly

Investment in Stock Market (% of Income)

6% 20% Less than 10% 10% to 20% 20% to 30% 17% 8%

Sources of Market Info

6% 30% 39% Newspapers Television Magazines Internet Others

44%

30%

62% of the respondents classified themselves as investors against traders. 41% of them are investing with a horizon of 1 to 3 years and 50% of the respondents have been investing in the stock markets and more than half of the respondents (51%) trades on a quarterly basis. 44% of the investors invest 20% to 30% of their income in stock markets. 39% of the respondents said that they track the market through television and 30% track through newspapers.

Awareness of ETFs: Awareness of ETF Awareness of Types of ETF

33% 39% 61% Yes No 77% 87% Index ETF Gold ETF Liquid ETF

39% of the respondents were aware about Exchange Traded Funds. Of these 39%, majority (87%) were aware about Index ETFs while 77% and 33% were aware about Gold ETFs and Liquid ETFs.

Investment in ETF: Invest in ETF? Investment in Types of ETF

17 41% 59% Yes No 39 70 Index ETF Gold ETF Liquid ETF

Of the 39% that were aware of ETFs, about 59% invested in them; also about 70% of these invested in Index ETFs.

Overall Investment Patterns: Other Investments

Direct Equity 19% 16% 21% 18% Fixed Income Securities 26% Gold Mutual Funds Real Estate Risk Spreading 30% 33% 37% Trading Convenience Easy Trackability

Reasons to Invest in ETF

According to survey, 26% of the investors stated their preference as Fixed Income Securities followed by 21% for Gold and 19% for Real Estate. When asked about their reason for investing in ETFs, Risk-Spreading came out to be the major reason stated by 37% of the investors.

Purpose of investment:
IMPORTANT THING FOR INVESTMENT ETFS ARE LESS EXPENSIVE

20% 24% 56%

return risk both

32% yes 68% no

According to survey, 56% investors preferred that return is most imp. Thing while takes an investment decision where 68% investors thinks that etfs are less expensive.

CONCLUSION & RECOMMENDATION

ETFs have grown in number since their introduction in India in 2001. From 1 fund in 2002 the number of exchange traded funds has increased to 18 in 2002. The most popular type of ETFs are Index ETFs. However, ETFs have not been able to gain substantial popularity among the investing community. From the survey we can understand that a considerable proportion of the investing community consists of people with families and dependants; who are looking for financial products which would provide them with decent returns without adding too much risk to their portfolio. Thus, ETFs fit the bill appropriately. ETFs need to be marketed more aggressively and extensively to create awareness among the investors regarding its benefits. The survey shows that most of the investors use television and newspapers to track the market. Later in the analysis, we can see that those who are aware of and invest in ETFs have gained awareness mostly through word of mouth. Thus, mass media should be used more widely to promote ETFs. It can be seen that amongst those aware about ETFs, the popularity of the product is high and they are willing to invest into the product. Hence, generating higher level of awareness among the investing public is sure to draw increased levels of investment towards Exchange Traded Funds.

FINDINGS

The majority of investors from the sample were men in the age bracket of 20 to 30
years who were married and had 3 dependants on an average.

They have sufficient disposable income to invest into the stock markets. Hence they
are looking for instruments which can give them decent returns without exposing them to too much risk.

Most of the respondents are investors with a medium time frame of investment and
have been investing since the last couple of years. The major sources of information that they use to track the market are television and newspapers. The number of respondents aware about ETFs is quite low at 39% which shows that ETFs have not yet gained popularity among the investor class. Among those who are aware of ETFs, maximum (87%) are aware only about Index ETFs. Amongst those aware of ETFs, the proportion of people who actually invest is quite high at about 60%; the majority of investments being in Index ETFs (about 70%). The proportion of investment in ETFs range between 10% and lower and up to 30% of the portfolio. Risk spreading is the major reason for investing into ETF.