Performance Evaluation of Gold ETF

Undertaken at Kotak Securities Ltd

Nithish Sebastian USN: 4MT10MBA 34

Contents
Company Profile Theoretical Background SWOT Analysis Learning Experience Study Objectives Research Design Analysis and Interpretation

Observations
Major Findings of the Study Conclusion

Kotak Securities Ltd is one of the oldest and largest broking firms in the Industry which was set up in the year 1994 as a 100 % subsidiary of Kotak Mahindra Bank.

Promoters: Uday kotak (founder) and Rahul Kejriwal

Kotak Securities is a corporate member of both The Bombay Stock Exchange and The National Stock Exchange of India Limited.

Vision:
Kotak works with the vision of being:

The global Indian financial services brand.

The most preferred employer in financial services. The most trusted financial services company. A value creator.

Products or Services:
Equities Derivatives Mutual funds Portfolio management service.

Research
Kotak Securities have been the first in providing many products and services which have now become industry standards. Some of them are: Facility of Margin Finance to the Customers for Online Stock Trading Investing In IPOs and Mutual Funds On the Phone Mobile Application to Track Portfolio of your Investments in Stock Market.

Gold ETF is an open ended ETF which would invest in gold and endeavor to track the spot price of gold. Thus it can be considered as means of investing in gold without taking physical delivery of gold. Each unit of Gold ETF may be approximately equal to 1gm or 0.5 gm of gold at the time of allotment. Working of Gold ETF Working of Gold ETF during New Fund Offer (NFO):
Investors The investor has to invest in minimum amount . For say, Kotakgold ETF Rs 5000 and in multiples of Re 1 thereafter. ETF Sponsor buys Gold and deposit it with the custodian

ETF Sponsor

Custodian

Demat A/ct of Investors

The units allotted will be credited to the depository account of the investors

Working of Gold ETF Ongoing:

Secondary Market Seller Primary Market ETF Units Stock Exchange

Cash Market making or Arbitrage Buy or Sell

Authorized Participants or Large Investors

Creation of units in exchange of physical gold ETF Sponsor Deposit the physical gold Custodian

Redemption of units in exchange of physical gold

Cash Buyer

ETF Units

Transferring physical gold in case of redemptions

Benefits of Investment in Gold Exchange Traded Fund (GETF)

Small Denomination: Liquidity: Transparent Pricing: Safety: Purity: Tax Efficient:

SWOT Analysis
Strengths:
Brand image is popular and can be capitalized. Efficient and committed employees Efficient back office support system which manages customer accounts effectively

and efficiently.
Efficient research and risk management team. Company continues to achieve cost efficiency through application of technologies. Effective and wider distribution network with presence of over 20,000 primary market sub brokers, 1420 outlets in 447 cities makes it one of the broking houses with the largest network and largest player in the distribution of IPOs. Provides both online and offline trading to meet changing needs of the customers. First mover and some of its products have become industry standards.

Weaknesses: No presence in the rural areas. Lack of promotional activities and effective strategies to attract customers. Lack of products and services that deliver to meet investment needs of students. Opportunity: There is continuous growth in this sector. People are more aware, knowledgeable and interested in investing in stock market. Increase in literacy, job opportunities and increase in income in the hands of the people seek more on investments to reduce tax liability as well as for the needs of the future.

India is one of the developing nations with wider geographical market and
according to the report of committee on vision 2020 India 2020 will be bustling with energy, entrepreneurship and innovation.

Bringing new innovative products and services that are more customized to meet the investment needs of the students and others. Threats: Competition in this sector is increasing with the entry of lots of private giants with the collaboration of foreign giants As all other securities broking houses come with similar products and services with almost equal brokerage charges it is bit difficult to capture and be

competitive in the market.

Changes in political, economic conditions, government policy and regulations and recent scams etc adversely affected indian stock market.

Learning Experience
Enhance knowledge about Gold ETF and draw inferences about Gold ETF as an investment option. Thus, by carrying out with the analysis, the researcher could draw a proper evaluation about the performance of Gold ETF from investment perspective. Could get real world experience about happenings in the stock market. As being in their office could dilate practical knowledge and comprehend to the glimpses of stock market and come to know about activities taking place at securities broking firm. Track intraday price movements of Gold ETF and could have interaction with the clients and staffs. This helped to understand the investors perception towards Gold ETF The researchers conceptual knowledge about the methodologies adopted for the study which has been gained from his class room experience could be enhanced by putting it practical and further, the real world experience gained from the company was immense and knowledgeable to understand the things more

Objectives of the Study:

To study the concept of Gold Exchange Traded Fund (GETF). To evaluate the performance of Gold ETF vis--vis MCXCOMDEX index.

Research Design
Methodology Data collection Statistical measure Sample size Limitations of the Study

Analysis and Interpretation

Financial Year2008
Symbol Returns (%) Alpha Beta (%) Sharpe Ratio Treynors Ratio Jensens Alpha (%)

GOLDBEES

25.58

1.75

0.56

0.19
0.18

10.79

33.71

.
35.59

GOLDSHARE

26
25.56

1.77 1.71 1.77 1.71

0.51
0.52

10.90

.
36.27

KOTAKGOLD

0.18

.
9.51

41.04

RELGOLD Market (MCXCOMDEX)

23.54 -35.96

0.54

0.18

31.19

39.88

. .

0 (Default)

Financial Year 2009

Symbol Returns (%) Beta Alpha (%) Sharpe Ratio 15.05 Treynors Ratio 143 Jensens Alpha (%) 11.19

GOLDBEES

23.86

1.14

0.12

0.07 0.07 0.07 0.07 0.07

GOLDSHARE

24.05

1.09
1.13

0.11

15.9

157.73

.
11.72

KOTAKGOLD

23.39

0.10
0.13

14.77

.
130.92

RELGOLD

23.72

1.16

14.67

.
10.92

QGOLDHALF Market (MCXCOMDEX)

22.59 56.44

1.19

0.10 1

158.9

1.63

0 (Default)

Financial Year2010
Symbol

Returns (%)

Beta

Alpha (%)

Sharpe
Ratio 16.27

Treynor Jensens Alpha sRatio (%)

36.39 39.57 9.46 9.83

GOLDBEES GOLDSHARE

20.53 20.55

0.84

0.38 0.35

0.05

0.80
0.81

0.06 0.06 0.06 0.06 0.06

.
17.19

KOTAKGOLD

20.62
20.44

0.35

39.77

9.90

RELGOLD

0.83

0.31
0.34

16.55

. .
39.91 9.66

QGOLDHALF

20.27

0.80
0.85

16.96

SBIGETS Market (MCXCOMDEX)

20.20

0.34

15.88

39.71

.
0 (Default)

18.20

0.90

Financial Year2011
Symbol GOLDBEES GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF SBIGETS RELIGAREGO HDFCMFGETF IPGETF AXISGOLD Market Returns (%) 27.95 27.74 28.43 28.75 28.24 28.51 27.83 27.41 27.20 27.33 16.23 1.21 1.19 1.20 1.20 1.19 1.26 1.21 1.24 1.26 1.17 1.06 Beta 0.50 0.44 0.49 0.49 0.46 0.36 0.46 0.43 0.48 0.41 1 Alpha (%) 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.09 0.08 0.09 Sharpe Ratio 17.56 17.68 18.11 . 18.10 17.31 17.46 16.70 16.27 17.63 . Treynors JensenAlp Ratio ha (%) 42.5 47.82 44.35 45 46.83 . 45.93 48.16 42.71 50.32 . 16.49 16.85 17.06 17.38 17.16 . 16.75 16.61 . 16.72 0 (Default)

Gold ETFs Launched in the FY 2011

Symbol Months Returns Beta Alpha (%)
BSLGOLDETF 1st June 2011 31st Dec 2011 1st Dec 2011 31st Dec 2011 19.51 1.63 0.57 0.10

(%)

IDBIGOLD

-7.27

1.02

0.59

- 0.33

Major findings of the Study:

In FY 2008, Market fetched negative returns. However, returns on Gold ETFs were positive. Thus investor could choose Gold ETF as an investment avenue during the period. In the FY 2008, Kotak Gold ETF has generated annual returns 25.56% with the lowest risk 1.71 thus risk averse investors would prefer Kotak Gold ETF.

In FY 2009, Market generated more returns than Gold ETFs. However, Jensens Alpha on Gold ETFs were positive which indicates that Gold ETFs fetched returns more than the expected returns.
In FY 2010 and 2011, Gold ETFs fetched more returns than Market. Thus investor could choose Gold ETF as an investment avenue during the period. In FY 2011, Relgold could generate 0.32% more returns than Kotakgold with the same level of risk 1.20.

In FY 2011, Quantum Gold ETF could generate 0.50% more returns than UTIs Goldshare with the same level of risk 1.19.
In FY 2011, Goldshare could produce 0.12% more returns than Religare Gold ETF with the same level of risk 1.21. In FY 2011, SBI Gold ETF could generate 1.31% more returns than ICICI Gold ETF with the same level of risk 1.26 . In FY 2011, The risk averse investor may prefer Axis Gold ETF which generated annual returns 27.33% with the risk 1.17 and The risk taking investor could prefer Relgold with annual returns 28.75% with the risk 1.20.

Financial Year (FY) 2008 Symbol Sharpe Ratio 10.79 Rank Treynors Ratio 33.71 Rank Jensens Alpha (%) . Rank

GOLDBEES

III

III

GOLDSHARE

10.90

II

35.59

IV

KOTAKGOLD

36.27

II

41.04

II

RELGOLD

9.51

IV

31.19

IV

39.88

III

MCXCOMDEX (Market)

24.95

42.66

0 (Default)

Symbol

Sharpe Ratio

Financial Year (FY) 2009 Treynor Rank sRatio Rank III 143
157.73 . 130.92 158.9 49.74

Jensens Alpha (%)

Rank

GOLDBEES

15.05
15.9 14.77 14.67 13.35 .

IV

11.19
. 11.72 10.55 10.92

III

GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF

II IV V VI

III I V II

I II V IV

MCXCOMDE X (Market)

VI

0 (Default)

VI

Symbol

Sharpe Ratio

Financial Year (FY) 2010 Treynors Rank Ratio Rank V

I II IV III VI VII

Jensens Alpha (%)

Rank

GOLDBEES
GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF SBIGETS MCXCOMDEX (Market)

16.27
. 17.19 16.55 16.96 15.88 12.78

36.39
39.57 39.77 . 39.91 39.71 11.5

VI
V III I II IV VII

9.46
9.83 9.90 . 9.66 9.59 0 (Default)

VI
III II I IV V VII

Symbol

Sharpe Ratio 17.56 17.68 18.11 . 18.10 17.31

Financial Year (FY) 2011 Treynors Rank Ratio Rank VI IV II I III VIII 42.5 47.82 44.35 45 46.83 . X IV VIII VII V I

Jensens Alpha (%) 16.49 16.85 17.06 17.38 17.16 .

Rank IX V IV II III I

GOLDBEES GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF SBIGETS

RELIGAREGO
HDFCMFGETF IPGETF AXISGOLD

17.46
16.70 16.27 17.63

VII
IX X V

45.93
48.16 42.71 50.32

VI
III IX II

16.75
16.61 15.93 16.72 0

VI
VIII X VII

Observations
From the returns perspective, returns on Gold ETFs move in same direction. This clearly indicates that Gold ETF prices move in accordance with physical Gold prices. The returns between Gold ETFs of various mutual fund houses vary at corresponding period of time. This disparity in returns at corresponding period of time is within the range of 0 to 2%. This clearly implies that the major portions of all Gold ETF portfolios is Physical Gold and also include other liquid assets. The Gold ETFs risk is very low. The standard deviation of Gold ETFs with respect to analysis ranges from 0.80 to 1.77 thus, the investor can expect at the maximum deviation of annual returns by -1.77 or +1.77 returns. In respect to market risk, the Gold ETFs have the beta value less than 1. Thus acts as a portfolio diversifier and investors can expect stable returns.

The Alpha of Gold ETFs is almost same during the corresponding period of time. Thus there is no significant difference in returns generated from the effective management of Gold ETF portfolio. Further, this also indicates that the systematic risk plays a crucial role in generating competitive returns, if market performs well.
Most of the Gold ETFs are ranked with different ranks under Sharpe ratio and Treynors ratio during corresponding period of time. Thus this upholds the fact that Gold ETF portfolio is inclusive of unsystematic risk. All the Gold ETFs has positive Jensens Alpha during the entire period subject to analysis which indicates that Gold ETFs has generated returns more than the expected returns.

C0nclusions
Gold ETF, which tracks physical gold prices, stands as a medium for investment in Gold. no chance of huge fluctuations in returns on investment in Gold ETF unlike that of equity.

Faced with a stagnant economy and a fear of recession, many investors are switching to gold as an investment alternative. Backed by this demand and buying by governments of different countries as a safety net, the price of gold is expected to rise further in the near future, bringing appreciation in value to Gold ETFs.
Hence we can say that Gold ETF is an attractive investment alternative, where one may expect good returns over a long term time horizon.