Project on

HDFC Gold Exchange Trade fund

Prepared by : Aadhar Jaiswal (IB-11093 Adman Gulit Masih(IB-11093 Neha Cheema (IB-1109316) Sayali subnis (IB-1109330) Ritika Grover(IB-1109 Vaibhav Jain(IB-1109

INTRODUCTION TO EXCHANGE TRADED FUNDS 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 f rom the AMC. ETF as a concept is relatively new in India. It was only in early nineties that the concept gained in popularity in the USA. ETFs have relatively lesser costs as compared to a mutual fund scheme. This is largely due to the structure of ETFs. While in case of a mutual fund scheme, the AMC deals directly with the investors or distributors, the ETF structure is such that the AMC does not have to deal directly with investors or distributors. It instead issues units to a few designated large participants, who are also called as Authorised Participants (APs), who in turn act as market makers for the ETFs. The Authorised Participants provide two way quotes for the ETFs on the stock exchange, which enables investors to buy and sell the ETFs at any given point of time when the stock markets are open for trading. ETFs therefore trade like stocks. Buying and selling ETFs is similar to buying and selling shares on the stock exchange. Prices are available on real time and the ETFs can be purchased through a stock exchange broker just like one would buy / sell shares. There are huge reductions in marketing expenses and commissions as the Authorised Participants are not paid by the AMC, but they get their income by offering two way quotes on the floor of the exchange. Due to these lower expenses, the Tracking Error for an ETF is usually low. Tracking Error is the acid test for an index fund/ ETF. By design an index

fund/ index ETF should only replicate the index return. The difference between the returns generated by the scheme/ ETF and those generated by the index is the tracking error. Assets in ETFs Practically any asset class can be used to create ETFs. Globally there are ETFs on Silver, Gold, Indices (SPDRs, Cubes, etc), etc. In India, we have ETFs on Gold, Indices such asNifty, Bank Nifty etc.). INTRODUCTION OF GOLD ETF In the last few years, Gold exchange-traded funds (ETFs) have gained popularity in India. Investors are aware of the benefits of investing in gold paper as opposed to holding it as jewellery. Each Gold ETF unit is almost equal to a gram of gold. These units are traded on the exchange like a stock of a company. Gold ETFs can be purchased online and they are one of the cheapest forms of purchasing gold as there is no premium or making charge like in purchase of jewellery. There are no quality issues as these are traded on exchange and a tax efficient way of investment as they don't attract STT or wealth tax. Further, there are no security issues of storage while purchasing online unlike in physical gold. Gold prices have been trading between $1,600 and $1,700 an ounce over the past two months, and supported recently by the Indian holiday Akshaya Tritiya. Meanwhile, the mixed bag of U.S. economic news has further supported the precious metal and focused ETFs. The young generation now prefers to invest online rather than go to jewelers, which is increasing the demand for paper gold, Harish Galipelli, head of research at commodity brokerage firm JRG Wealth Management, said in a WSJ.com report. Urban consumers not only prefer to purchase from the comfort of their homes but also see better value in ETFs as they are sure of the purity of the precious metal and it avoids costs charged for making jewelry.

Advantages of Gold ETFs Although the mode chosen for investing in gold would entirely depend on investors, Gold ETFs do offer some distinct advantages vis--vis investing in physical gold. 1. Convenience: Gold ETFs are a convenient means of investing in gold. Since there is no delivery involved, investors do not have to worry about the storage and security aspects that are typically associated with investing in physical gold. 2. Quality: As per SEBI regulations, the purity of underlying gold in Gold ETFs should be 0.995 fineness and above. This spares investors the trouble of finding a reliable source to buy gold. 3. No premium: Jewellers and banks generally sell gold at a premium. The premium can be in the range of 5%-10% (inclusive of making charges) in case of jewellers and upto 15% in case of banks. Since Gold ETFs are traded on the stock exchange, they can be bought at the prevailing market rate without paying any premium. 4. Low cost: To store physical gold, one would typically need a locker. This expense is over and above the premium paid at the time of buying physical gold. As for Gold ETFs, a pre-requisite is to have demat and trading accounts with a broker. To maintain these accounts, investors are required to pay annual charges, which vary from broker to broker. Investors also have to pay the brokerage on each trade. Finally, there are annual recurring charges which are charged to the fund. Considering the premium and other charges borne while buying physical gold, investing via Gold ETFs can turn out to be a more cost-effective option. 5. Transparent pricing: The pricing of physical gold varies depending on the vendor. Conversely, Gold ETFs have a transparent pricing mechanism. International gold prices are converted to Indian landed price using the applicable exchange rate. Various duties and taxes are also added to arrive at the landed price of gold. 6. Tax efficiency: In Gold ETFs, long-term capital gains tax is applicable after twelve months from the date of purchase vis--vis three years in the

case of physical gold. Also, unlike physical gold, investments in Gold ETFs are not subject to Wealth Tax. 7. Resale value: Gold ETFs can be easily sold in the secondary market on a realtime basis (i.e. at the prevailing market price). Whereas, while selling physical gold, the jeweller will deduct making charges (the charge that is added while buying gold). As regards banks, they refuse to buy back gold.

Research objective : HDFC Mutual fund is considering to launch an open ended exchange traded fund i.e. HDFC Gold exchange traded fund for every major segment of the market .The investment objective of the scheme is to generate returns that are in line with performance of gold ,subject to tracking errors .The director wants to identify group of customers having knowledge about the product and to identify prominent segments of customers i.e. group of customers that have similar buying preferences that would help management to target those segments & matching the preferences to achieve optimum market share in those selected segments .