background of stock exchange in india
TRANSCRIPT
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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 thefirst 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.
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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
stockbrokers. 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. Stockbrokers2. sub-broker3. market makers4. 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.
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Detail of registered brokers
Total no. of registered brokers as
on 31.03.2008
Total no. of sub-brokers as on
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
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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.
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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 rationalallocation 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.
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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 theBSE, 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 financialservices.
IIFL offers advice and execution platform for the entire range of financial services coveringproducts ranging from Equities and derivatives, Commodities, Wealth management, Asset
management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other smallsavings instruments.
We have a presence in:
Equities our core offering, gives us a leading market share in both retail and institutionalsegments. Over a million retail customers rely on our research, as do leading FIIs and MFs thatinvest billions.
Private Wealth Management services cater to over 2500 families who have trusted us withclose to Rs 25,000 crores ($ 5bn) of assets for advice.
Investment Banking services are for corporates looking to raise capital. Our forte is EquityCapital Markets, where we have executed several marquee transactions.
Credit & Finance focuses on secured mortgages and consumer loans. Our high quality loanbook of over Rs. 6,200 crores ($ 1.2bn) is backed by strong capital adequacy of approximately20%.
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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 ourproduct suite to help customers build a balanced portfolio.
IIFL has received membership of the Colombo Stock Exchange becoming the first foreignbroker to enter Sri Lanka. IIFL owns and manages the website,www.indiainfoline.com, which isone of Indias leading online destinations for personal finance, stock markets, economy and
business. IIFL has been awarded the Best Broker, Indiaby Finance Asia and the Mostimproved brokerage, Indiain theAsia Money polls. India Infoline was also adjudgedas Fastest Growing Equity Broking House - Large firmsbyDun & Bradstreet. A forerunnerin the field of equity research, IIFLs research is acknowledged by none other
than Forbes as Best of the Weband 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 ofthe most read Indian brokers.
IIFL is a listed company with a consolidated group networth of about Rs 1,800 crores. Theincome 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 itslisting in 2005. The company is listed on both Exchanges and also trades in the derivativessegment.
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-/Stableby 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 locationsacross 500 cities in India. You can reach us in a variety of ways, online, over the phone andthrough our branches. All our offices are connected with the corporate office in Mumbai withcutting edge networking technology. The group caters to a customer base of about a millioncustomers.
Our physical presence in key global markets includes subsidiaries in Colombo, Dubai, NewYork, Mauritius, London, Singapore and Hong Kong.
IIFL/India Infoline refer to India Infoline Ltd and its subsidiaries/ group companies.
http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/ -
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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
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2000
Launched online trading throughwww.5paisa.comStarted distribution of life insurance and mutual fund
1999
Launchedwww.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
http://www.5paisa.com/http://www.5paisa.com/http://www.5paisa.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.5paisa.com/ -
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CORPORATE STRUCTURE OF IIFL
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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).
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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 Brokerage forDelivery
Brokerage forIntraday trading
MMC*
SBICAP Securities
brokerage charges0.50% 0.10% NIL
Sharekhan
brokerage charges0.03% - 0.50% 0.03% - 0.10% NIL
Motilal Oswal
brokerage charges0.30% - 0.50% 0.03% - 0.15%
5 paisa
brokerage charges0.25% - 0.85% 0.07%
Angel Broking
brokerage charges0.50% 0.02% - 0.03%
ICICI direct
brokerage charges0.75% 0.15%
Indiabulls
brokerage charges0.25% - 0.50% 0.05% - 0.10%
HDFC Securities
brokerage charges0.50% 0.15%
UTI Securities
brokerage charges0.80% 0.15%
Religare
brokerage charges0.20% - 0.30% 0.02% - 0.03%
Reliance Money
brokerage charges0.01% 0.01% card system
Geogit
brokerage charges
0.30% 0.03%
Indiainfoline
brokerage charges0.50% 0.10% -
MMC=Minimum monthly commitment.
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SCHEDULE OF BROKERAGE AND OTHER CHARGES-CURRENCY SEGMENT
OTHER CHARGES
STAMP DUTY - As applicable Rs. 200/- per Crore
Service Tax - As applicable 10.30%
Regulatory Charges Rs. 10/- Per 1 Crore
CURRENCY SEGMENT
BROKERAGE STANDARD RATE QUOTED RATE
Brokerage futures Rs. 25 per lot
Brokerage options Rs. 10 per lot
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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 ofexchange-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 ofactively 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.
http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Net_asset_valuehttp://en.wikipedia.org/wiki/Trading_dayhttp://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/MSCI_EAFEhttp://en.wikipedia.org/wiki/Tax_efficiencyhttp://en.wikipedia.org/wiki/Tax_efficiencyhttp://en.wikipedia.org/wiki/Exchange-traded_producthttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Payment_in_kindhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Unit_investment_trusthttp://en.wikipedia.org/wiki/Closed-end_fundhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Active_managementhttp://en.wikipedia.org/wiki/Active_managementhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Closed-end_fundhttp://en.wikipedia.org/wiki/Unit_investment_trusthttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Payment_in_kindhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Exchange-traded_producthttp://en.wikipedia.org/wiki/Tax_efficiencyhttp://en.wikipedia.org/wiki/Tax_efficiencyhttp://en.wikipedia.org/wiki/MSCI_EAFEhttp://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Trading_dayhttp://en.wikipedia.org/wiki/Net_asset_valuehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stock_exchange -
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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.
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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 ofBarclays 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 Rockin
2009. The Vanguard Group entered the market in 2001.
http://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/American_Stock_Exchangehttp://en.wikipedia.org/wiki/Philadelphia_Stock_Exchangehttp://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Standard_%26_Poor%27s_Depositary_Receiptshttp://en.wikipedia.org/wiki/Standard_%26_Poor%27s_Depositary_Receiptshttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/quickquote.html?ticker=spyhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/quickquote.html?ticker=mdyhttp://en.wikipedia.org/wiki/Barclays_plchttp://en.wikipedia.org/wiki/IShareshttp://en.wikipedia.org/wiki/MSCIhttp://en.wikipedia.org/wiki/Unit_investment_trusthttp://en.wikipedia.org/wiki/SPDRhttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-14http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-14http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-14http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/quickquote.html?ticker=diahttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/NASDAQhttp://www.nasdaq.com/symbol/qqqqhttp://en.wikipedia.org/wiki/NASDAQ-100http://en.wikipedia.org/wiki/Barclays_Global_Investorshttp://en.wikipedia.org/wiki/IShareshttp://en.wikipedia.org/wiki/Barclays_Global_Investorshttp://en.wikipedia.org/wiki/BlackRockhttp://en.wikipedia.org/wiki/The_Vanguard_Grouphttp://en.wikipedia.org/wiki/The_Vanguard_Grouphttp://en.wikipedia.org/wiki/BlackRockhttp://en.wikipedia.org/wiki/Barclays_Global_Investorshttp://en.wikipedia.org/wiki/IShareshttp://en.wikipedia.org/wiki/Barclays_Global_Investorshttp://en.wikipedia.org/wiki/NASDAQ-100http://www.nasdaq.com/symbol/qqqqhttp://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://www.nyse.com/about/listed/quickquote.html?ticker=diahttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-14http://en.wikipedia.org/wiki/SPDRhttp://en.wikipedia.org/wiki/Unit_investment_trusthttp://en.wikipedia.org/wiki/MSCIhttp://en.wikipedia.org/wiki/IShareshttp://en.wikipedia.org/wiki/Barclays_plchttp://www.nyse.com/about/listed/quickquote.html?ticker=mdyhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/quickquote.html?ticker=spyhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Standard_%26_Poor%27s_Depositary_Receiptshttp://en.wikipedia.org/wiki/Standard_%26_Poor%27s_Depositary_Receiptshttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-Gastineau-9http://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/Philadelphia_Stock_Exchangehttp://en.wikipedia.org/wiki/American_Stock_Exchangehttp://en.wikipedia.org/wiki/S%26P_500 -
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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.
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STRUCTURE
ETFs offer public investors an undivided interest in a pool ofsecurities 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.
http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Payment_in_kindhttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Money_market_fundhttp://en.wikipedia.org/wiki/Securities_lendinghttp://en.wikipedia.org/wiki/Securities_lendinghttp://en.wikipedia.org/wiki/Money_market_fundhttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Payment_in_kindhttp://en.wikipedia.org/wiki/Security_(finance) -
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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 assetsthe 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 theidentities 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 transparentactively 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.
http://en.wikipedia.org/wiki/Investment_Company_Act_of_1940http://en.wikipedia.org/wiki/Investment_Company_Act_of_1940http://en.wikipedia.org/wiki/PowerShareshttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-5http://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-5http://en.wikipedia.org/wiki/American_Stock_Exchangehttp://en.wikipedia.org/wiki/American_Stock_Exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fund#cite_note-5http://en.wikipedia.org/wiki/PowerShareshttp://en.wikipedia.org/wiki/Investment_Company_Act_of_1940http://en.wikipedia.org/wiki/Investment_Company_Act_of_1940 -
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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.
http://en.wikipedia.org/wiki/Merrill_Lynchhttp://en.wikipedia.org/wiki/Closed-end_fundhttp://en.wikipedia.org/wiki/Closed-end_fundhttp://en.wikipedia.org/wiki/Merrill_Lynch -
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STRUCTURE OF ETFs
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How ETFs is different from Traditional Mutual Funds
Since ETFs trade like stocks, they offer a degree of flexibility unavailable with Traditional
mutual funds. Specifically, investors can trade ETFs intra-day, monitor Price discoverythroughout 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.
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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 likecomparing 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, readAn 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, readAdvantages
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
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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, readRebalance 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.
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Creations and Redemptions
ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for
cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares ofcompanies 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 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.
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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 obtainexposure 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.
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Investment Uses
ETFs generally provide the easydiversification, low expense ratios, and tax efficiency ofindex
funds, while still maintaining all the features of ordinary stock, such aslimit orders,short selling,
andoptions. 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 implementmarket timinginvestment strategies.[5Among
the advantages of ETFs are the following:
Lower costsETFs generally have lower costs than other investment products because mostETFs 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
have12b-1 fees.
Buying and selling flexibilityETFs can be bought and sold at current market prices at anytime 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 ofhedgingstrategies, and traded using
stop orders and limit orders, which allow investors to specify the price points at which they
are willing to trade.
Tax efficiencyETFs generally generate relatively low capital gains, because they typicallyhave 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 diversificationETFs provide an economical way to rebalanceportfolio 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.
http://en.wikipedia.org/wiki/Diversification_(finance)http://en.wikipedia.org/wiki/Diversification_(finance)http://en.wikipedia.org/wiki/Diversification_(finance)http://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Limit_orderhttp://en.wikipedia.org/wiki/Limit_orderhttp://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Market_timinghttp://en.wikipedia.org/wiki/Market_timinghttp://en.wikipedia.org/wiki/Market_timinghttp://en.wikipedia.org/wiki/Mutual_fund_fees_and_expenseshttp://en.wikipedia.org/wiki/Mutual_fund_fees_and_expenseshttp://en.wikipedia.org/wiki/Mutual_fund_fees_and_expenseshttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Mutual_fund_fees_and_expenseshttp://en.wikipedia.org/wiki/Market_timinghttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Limit_orderhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Diversification_(finance) -
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TransparencyETFs, whether index funds or actively managed, have transparent portfoliosand 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. Alow-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, readAsset Allocation Strategies.)
Diversification ETFs allow the investor not only to diversify across all the major assetclasses, 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, readIntroduction To Diversification.)
Hedging The use of ETFs allows for a variety of hedging strategies. Investors who wantto 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
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hedging strategies, either separately or in conjunction with the underlying ETF. (To learn
more, check outA 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.
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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 $120 billion (as on June 2002) is 6 invested in about 230 ETFs.
About 60% of trading volumes on the American Stock Exchange are from ETFs. The most
popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the
S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang
Seng Index. The average daily trading volume in QQQ is around 89 million shares. Their passive
nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they
trade roughly in line with the net asset values of their underlying portfolios. For the mechanism
to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.
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History
Deregulation of Gold in India
In India goldsmiths are usually men, and are referred to by a variety of names depending on the
region. In the Vedic period (Second Millennium BC),goldsmiths had a much higher standing in
society than most other artisans,probably because they worked with a precious metal. The
goldsmiths enjoyed royal patronage. Historical evidence suggests that Indian jewellers had early
mastery of the various skills required to make fine jewellery, such as mixing alloys, moulding,
setting stones, inlay work, relief, drawing gold and silver into fine wires, plating and gilding. The
duties of the goldsmith have been defined in an ancient social code, but are observed more by
breach than by adherence. There is hardly any village or town, even in the remote corners of the
country, where there is no goldsmith.
Gold Econony
Today, the gold/jewellery industry is fast-growing, with impressive domestic and export sales.
Gems and jewellery constitute one of the fastest growing export sectors in India, accounting for
one-fifth of the aggregate exports. The current size of the gold economy is around US$ 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.
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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 ExchangeRegulation 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.
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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
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
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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 onstock 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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Objectives of the Study
To provide an insight into the concept of ETF and to study the benefits of investing inthem.
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.
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Source of Data Collection
PRIMARY DATA: The primary data was collected from the sample through sample surveywith 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 resultsbeing 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 notinclude investors of other geographical areas.
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ANANLYSIS & INTERPRETATION
Investment Patterns:
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.
38%
62%
Respondent Category
Trader
Investor
38%
41%
13%8%
Investment Horizon
Less than 1
year
1 to 3 years
3 to 5 years
31%
40%
19%
10%
Investing Since
Less than 1
year
1 to 3 years
3 to 5 years
More than 5
years
4% 6%
13%
26%
51%
Trading Horizon
Intra day
Daily
Weekly
Monthly
Quarterly
20%
30%44%
6%
Investment in Stock Market (% of
Income)
Less than 10%
10% to 20%
20% to 30%
30%
39%
8%
17%6%
Sources of Market Info
Newspapers
Television
Magazines
Internet
Others
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Awareness of ETFs:
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:
Of the 39% that were aware of ETFs, about 59% invested in them; also about 70% of these
invested in Index ETFs.
39%
61%
Awareness of ETF
Yes
No
87%
77%
33%
Awareness of Types of ETF
Index ETF
Gold ETF
Liquid ETF
59%
41%
Invest in ETF?
Yes
No7039
17
Investment in Types of ETF
Index ETF
Gold ETF
Liquid ETF
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Overall Investment Patterns:
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:
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.
18%
26%
21%
16%
19%
Other Investments
Direct Equity
Fixed Income
Securities
Gold
Mutual Funds
Real Estate
37%
33%
30%
Reasons to Invest in ETF
Risk Spreading
Trading
Convenience
Easy
Trackability
56%24%
20%
IMPORTANT THING FOR INVESTMENT
return
risk
both
68%
32%
ETFS ARE LESS EXPENSIVE
yes
no
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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.
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FINDINGS
The majority of investors from the sample were men in the age bracket of 20 to 30years who were married and had 3 dependants on an average.
They have sufficient disposable income to invest into the stock markets. Hence theyare 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 andhave been investing since the last couple of years.
The major sources of information that they use to track the market are television andnewspapers.
The number of respondents aware about ETFs is quite low at 39% which shows thatETFs have not yet gained popularity among the investor class.
Among those who are aware of ETFs, maximum (87%) are aware only about IndexETFs.
Amongst those aware of ETFs, the proportion of people who actually invest is quitehigh 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.
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