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PROJECT REPORT ON STUDY OF EXCHANGE TRADED FUND GOLD ETF

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT OF DEGREE OF MASTERS IN FINANCIAL MANAGEMENT (MFM) FROM THE UNIVERSITY OF MUMBAI

SUBMITTED BY HARDIK S OZA MFM 2011-2014 UNDER THE GUIDANCE OF PROF. SAMEER LAKHANI

N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, MIRA ROAD EAST MUMBAI 401104

TABLE OF CONTENTS Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 History Definition of ETF Types of ETF Structure Advantages of ETF Factors Driving ETF Growth ETF Payment Cycle ETF-A world Scenario Introduction and Objective Gold ETF Importance and Benefits of Gold ETF Features Comparison of Gold ETF with other avenue Risk Factors Appointment and Role of Custodian Fees and Expenses Gold ETF Creation of Units and NAV List of Gold ETF Companies Gold ETF Turnover and Performance Suggestions Findings Conclusion Bibliography Topic Page No. 5 6 7-8 9 10 11 12 13-14 15 16 17-20 21 22-34 34-37 38-40 41 42 43-44 45 45 45 45

CERTIFICATE
I hereby declare that the project entitled STUDY OF EXCHANGE TRADED FUND GOLD ETF is submitted in partial fulfilment of my MFM course 2011-2014 was carried out with sincere intention of benefiting the organization. The project duration was from 30th August 2013 to 29th September 2013.

To the best of my knowledge it is an original piece of work done by me and it has neither been submitted to any other organization nor been published anywhere before.

Prof. Sameer Lakhani Project Guide

Prof. P.L.Arya Director

Acknowledgement

With deep satisfaction and immense pleasure I am presenting this project report on STUDY OF EXCHANGE TRADED FUND GOLD ETF in partial requirements for the MFM course. I would like to extend my sincere gratitude and appreciation to my project guide Prof. Sameer Lakhani who initiated me into this project. It has indeed been a great experience working under his guidance during the course of the project. I would like to thank him for his valuable advice and support throughout this project. And last but not the least I would like to thank all the Faculty Members, staff of the institute for their help in making my project an unforgettable and great learning experience.

History :
ETFs were launched post the 1987crash to overcome the lack of liquidity and intense program trading in the market. ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 that traded on the American Stock Exchange and the Philadelphia Stock Exchange. Toronto Index Participation Shares started trading on the Toronto Stock Exchange in 1990 which tracked the TSE 35 and later the TSE 100 stocks. The first ETF trade on a U.S. exchange was Statestreets SPDR (SPY) which was introduced in 1993. SPY tracks S&P 500 index and is currently the most heavily traded security in the world. In 1998, State Street Global Advisors introduced the "Sector Spiders", which follow the nine sectors of the S&P 500. Barclays, a British multinational banking and financial services company headquartered in London. In 2000 Barclays Global Investors put a significant effort behind the ETF marketplace iShares line was launched in early 2000. Within 5 years iShares had surpassed the assets of any other ETF competitor in the U.S. and Europe.

Definition of ETFs :
Exchange Traded Fund (ETF) is an investment fund that traded on stock exchanges much like stocks. Holds assets such as stocks, commodities, or bonds, and trades close to its net asset value. Experience price changes throughout the day as they are bought and sold. ETF's can be bought / sold just like stocks through trading terminals anywhere across the country. By owning an ETF, you get the diversification of an index fund.

Exchange Traded Fund ETFs are mutual funds that trades like stock : ETFs Provides Benefits of both Mutual Fund : Simplicity Transparency Risk Control Diversification Open End Fund Stock : On Exchange Trading Flexibility Trading Strategies

Types of ETFs :
Index ETFs : Funds that attempt to replicate the performance of a specific index. Indexes may be based on stocks, bonds, commodities, or currencies. Stock ETFs : The first and most popular ETFs track stocks. Many funds track national indexes; for example, Vanguard Total Stock Market ETF NYSE Arca: VTI tracks the MSCI US Broad Market Index, and several funds track the S&P 500, both indexes for US stocks. Bond ETFs : Exchange-traded funds that invest in bonds are known as bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and into bonds (for example, government treasury bonds. Currency ETFs : In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency Trust (NYSE Arca: FXE) in New York. Since then Rydex has launched a series of funds tracking all major currencies under their brand Currency Shares. Leveraged ETFs : These, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. Leveraged index ETFs are often marketed as bull or bear funds. Attempt to achieve daily returns that are 2x or 3x more pronounced than the Dow Jones Industrial Average or the S&P 500.Leveraged ETFs require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing.

Currency ETFs : In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency Trust (NYSE Arca: FXE) in New York. Since then Rydex has launched a series of funds tracking all major currencies under their brand Currency Shares. Leveraged ETFs : These, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. Leveraged index ETFs are often marketed as bull or bear funds. Attempt to achieve daily returns that are 2x or 3x more pronounced than the Dow Jones Industrial Average or the S&P 500.Leveraged ETFs require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing.

Structure of ETFs : ETFs offer public investors an undivided interest in a pool of securities. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Only authorized participants, which are large broker-dealers that entered into agreements with the ETF's distributor, actually buy or sell shares of an ETF directly from or to the ETF , and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged inkind. Authorized participants may wish to invest in the ETF shares for the longterm, but they usually act as market makers to provide liquidity. Creation units happens through Authorize participants. If there is strong investor demand for an ETF, its share price will (temporarily) rise above its net asset value per share at premium and vice versa.

Advantage of ETF :
Lower costs : ETFs generally have lower costs than other investment products because most ETFs are not actively managed. ETFs typically have lower marketing, distribution and accounting expenses. 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. 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. 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. Transparency : ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.

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Factors Driving ETF Growth :


Large variety of Equity , Fixed Income, Commodity and other covered by ETF Facilitation of Investor education & trading by large broking houses. Special market campaigns by on-line brokers Major fund platforms embracing ETFs Regulatory changes in the US, Europe and many emerging markets that allows fund to make large allocation of ETFs. Development and growth of investment style that deliver low cost product.

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ETF SETTELMENT CYCLE :

SR. No

DAY

TIME

ACTIVITY

----

Trading day

T+1

1300

Custodian Confirmation

T+1

1430

Final Obligation download

T+2

1100

Securities and Funds pay-in

T+2

1330

Securities and Funds pay-out

T+2

----

Auction for shortages

T+3

----

Securities Auction & pay-in/pay-out

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ETF-A world Scenario :


Growth of ETFs Internationally

Growth of ETFs in India

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Introduction :
Gold ETF : Gold ETF is an Open ended Gold Exchange Traded Fund. The Fund invests in, Physical gold of prescribed quantity and quality (fineness). The investment objective of the Scheme is to generate returns that are in line with the performance of gold, subject to tracking errors. Exchange Traded Funds (popularly known as ETF) are schemes whose units are listed on the Stock Exchange and can be bought or sold at a price, which may be close to the NAV of the scheme. ETF tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Objective : The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). The performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors. Why Should I Invest in Gold : It is not correlated with other asset classes because gold price is not necessarily driven by the same factors that drive the performance of other asset classes. Gold has been called a "barometer of fear." When people are anxious about the economy - they turn to gold and bid the price up. The two main things that make people anxious are deflation and inflation. Gold is an inflation hedge as proved by a 400-year study of the purchasing power of gold in Britain between 1596 and 1997. One ounce of gold would consistently purchase the same amount of goods and services as it would have done 400 years ago. Gold has significantly low correlation to other assets like equity indices, fixed income and commodities. Therefore adding gold to a portfolio may help improve risk adjusted returns or reduce volatility for the expected return. High Domestic Demand: India is the largest gold market in the world. In terms of jewellery consumption, investment and industrial demand, it accounted for ~32% of total global demand for gold in 2010.
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Importance and Benefits of Gold ETF :


The correct way to think about owning gold is as insurance. Unlike shares of a company or government bonds - gold will always retain value. Gold's most important use is insurance against the paper (fiat) currency of the country you live in. Almost every country has had at least one major "currency crisis" over the last one hundred years. Those that had some of their wealth in gold survived. So, think of gold as insurance. Do not think of gold as a way to "make money." Do not try and "time the market."

Benefits of Investing in Gold ETF :


Low cost : When you buy R* Shares Gold ETF you have to pay brokerage charges, which is usually much lower than paying for making charges when you buy physical gold. Transparency: R* Shares Gold ETF, the rates are transparent as they are traded like a share on the National Stock Exchange / Bombay Stock Exchange and therefore it provides the ability to buy and sell them quickly at the ruling market price and therefore highly liquid. There is no consistency when you buy and sell physical gold across jewellers or banks Safety & Security: No concerns about security, theft. Safeguard in the form of electronic mode in the case of unforeseen circumstances. Collateral for trading on NSE: R* Shares Gold ETF is accepted as collateral for trading on National Stock Exchange of India Ltd. Ability to buy in small units: R* SHARES GOLD ETF one unit is approximately equal to one gram of gold which can be directly bought through the trading terminals. No securities transaction tax for trading R* SHARES GOLD ETF on the National Stock Exchange Of India Ltd. Wealth tax is also Nil. Feasibility: R* SHARES GOLD ETF units are available on NSE and BSE which provides feasibility to the investor to buy and sell the units during trading hours of the exchange. It enables to limit orders as well as permits intraday trading

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Features OF THE SCHEME :


Where the Scheme will Invest :

Features of Gold ETF : Cheapest form of pure physical gold with no premium or making charges No issues of wastages or impurities like in the case of physical gold Tax efficient way to hold gold , Not security transaction tax or wealth tax Can be easily purchased or sold anytime at transparent real time price Can track your investment in real time Easy to buy small lots, 1 Unit at time No worries of theft and also save on locker charges Benefit on long term gain

Investment objective : The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors. However, there can be no assurance that the investment objective of the scheme will be achieved.
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Liquidity : All investors may sell their units in the stock exchange(s) on which these units are listed on all the trading days of the stock exchange. Alternatively Authorised Participant can directly buy /sell in blocks from the fund in Creation Unit Size. Benchmark : As there are no indices catering to the gold sector/securities linked to Gold, currently R*Shares Gold ETF shall be benchmarked against the price of Gold. Purity of Gold: All gold bullion held in the schemes allocated account with the custodian shall be of fineness (or purity) of 995 parts per 1000 (99.5%) or higher. Transparency /NAV Disclosure : a) The NAV will be calculated and disclosed at the close of every working day which shall be published in at least two daily newspapers and also uploaded on the AMFI website and AMC (Asset management company) website. b) If the NAVs are not available before commencement of business hours on the following day due to any reason, the Fund shall issue a press release providing reasons and explaining when the Fund would be able to publish the NAVs. c) The information on NAV may be obtained by the Unit holders on any day from the office of the AMC / the office of the Registrar or any of the other Designated Investor Service Centres. d) Investors may also note that AMC shall service its customers through the call center from Monday to Saturday between 8.00 am to 9.00 pm. However, 24x7 facility shall be available for addressing the queries through interactive voice response (IVR). e) Publication of Abridged Half-yearly Unaudited Financial Results in the newspapers or as may be prescribed under the Regulations from time to time.

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f) Communication of Portfolio on a half-yearly basis to the Unit holders directly or through the Publications or as may be prescribed under the Regulations from time to time. g) Despatch of the Annual Reports of the respective Schemes within the stipulated period as required under the Regulations. h) The fund shall disclose the schemes portfolio in the prescribed format as on the last day of the month for all the schemes of AMC on or before the tenth day of the succeeding month or within such timelines as prescribed by SEBI from time to time. Loads : Entry & Exit Load: Not Applicable There will be no entry/exit load on R*Shares Gold ETF bought or sold through the secondary market on the NSE/BSE. However, an investor would be paying cost in the form of a bid and ask spread and brokerage, as charged by his broker for buying / selling R*Shares Gold ETF. W.E.F. October 01, 2012, Exit Load If charged to the scheme shall be credited to the scheme immediately net of service tax, if any. As per the Regulations, the redemption price shall not be lower than 93% of NAV and the purchase price shall not be higher than 107% of the NAV and the difference between the redemption price and purchase price shall not exceed 7% of the purchase price.

In case, there are no quotes on the NSE and BSE for five trading days consecutively, an investor can sell directly to the fund with an exit load of 5% of NAV. The payout of such redemptions will be on the respective pay-out day. Minimum Application Amount : Purchases directly from the Mutual Fund would be restricted to Authorised Participants provided the value of units to be purchased is in creation Unit size.

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The minimum number of Units that can be bought or sold on the exchange is 1 (one) unit and in multiples of 1 unit. CHOICE OF INV ESTMENT PLANS : Growth & Dividend payout REPATRIATION : Full Repatriation benefits would be available to NRIs, PIOs and FIIs, subject to applicable conditions/regulations notified by Reserve Bank of India from time to time. Listing : The units of R*Shares Gold ETF is listed on the Capital Market Segment of the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE). The trading will be as per the normal settlement cycle. The minimum number of units that can be bought or sold through the stock exchange is 1 (one) unit. The AMC reserves the right to list the units of the Scheme on any other recognized stock exchange.

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Why not Gold Coins/Bars/Jewellery :

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A) RISK FACTORS :
a) STANDARD RISK FACTORS Mutual Funds and securities investments are subject to market risks such as trading volumes, settlement risk, liquidity risk and default risk including the possible loss of principal and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As the price / value / interest rates of the securities in which the scheme invests fluctuates, the value of your investment in the Scheme may go up or down. Past performance of the Sponsor/AMC/Mutual Fund does not guarantee future performance of the scheme. The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initial contribution of Rs.1 lakh made by it towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. The present scheme is not a guaranteed or assured return scheme. The Mutual Fund is not guaranteeing or assuring any dividend/ bonus. The Mutual Fund is also not assuring that it will make periodical dividend/bonus distributions, though it has every intention of doing so. All dividend/bonus distributions are subject to the availability of distributable surplus of the Scheme.

B) SCHEME SPECIFIC RISK FACTORS :


Risks associated with investing in Bonds : Investment in Debt is subject to price, credit, and interest rate risk. The NAV of the Scheme may be affected, inter alia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. Investing in Bonds and Fixed Income securities are subject to the risk of an Issuers inability to meet principal and interest payments obligation (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of
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the creditworthiness of the issuer and general market liquidity (market risk). The timing of transactions in debt obligations, which will often depend on the timing of the Purchases and Redemptions in the Scheme, may result in capital appreciation or depreciation because the value of debt obligations generally varies inversely with the prevailing interest rates. Interest Rate Risk : As with all debt securities, changes in interest rates will affect the Schemes Net Asset Value as the prices of securities generally increase as interest rates decline and generally decrease as interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV. Liquidity or Marketability Risk : This refers to the ease at which a security can be sold at or near its true value. The primary measure of liquidity risk is the spread between the bid price and the offer price quoted by a dealer. Liquidity risk is characteristic of the Indian fixed income market. Credit Risk : Credit risk or default risk refers to the risk which may arise due to default on the part of the issuer of the fixed income security (i.e. will be unable to make timely principal and interest payments on the security). Because of this risk debentures are sold at a yield spread above those offered on Treasury securities, which are sovereign obligations and generally considered to be free of credit risk. Normally, the value of a fixed income security will fluctuate depending upon the actual changes in the perceived level of credit risk as well as the actual event of default. Reinvestment Risk : This risk refers to the interest rate levels at which cash flows received from the securities in the Scheme or from maturities in the Scheme are reinvested. The additional income from reinvestment is the interest on interest component. The risk refers to the fall in
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the rate for reinvestment of interim cash flows. Risks associated with various types of securities Different types of securities in which the scheme would invest as given in the Scheme Information Document carry different levels and types of risk. Accordingly, the schemes risk may increase or decrease depending upon its investment pattern e.g. corporate bonds, carry a higher level of risk than Government securities. Further even among corporate bonds, bonds which are AAA rated are comparatively less risky than bonds which are AA rated.

C) Risk associated with investing in Derivatives :


Valuation Risk The risk in valuing the Debt & Equity derivative products due to inadequate trading data with good volumes. Derivatives with longer duration would have higher risk viz a viz the shorter duration derivatives. Mark to Market Risk The day-to-day potential for an investor to experience losses from fluctuations in underlying stock prices and derivatives prices. Systematic Risk The risk inherent in the capital market is due to macro economic factors like Inflation, GDP, Global events. Liquidity Risk The risk stemming from the lack of availability of derivatives products across different maturities and with different risk appetite. Implied Volatitly The estimated volatility of an underlying securitys price and derivatives price.

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Interest Rate Risk The risk stemming from the movement of Interest rates in adverse direction. As with all the debt securities, changes in the interest rates will affect the valuation of the portfolios. Counterparty Risk (Default Risk) Default risk is the risk that losses will be incurred due to the default by the counterparty for over the counter derivatives. System Risk The risk arising due to failure of operational processes followed by the exchanges and OTC participants for the derivatives trading. B) REQUIREMENT OF MINIMUM INV ESTORS IN THE

SCHEME :
The Scheme/Plan shall have a minimum of 20 investors and no single investor shall account for more than 25% of the corpus of the Scheme/Plan(s). However, if such limit is breached during the NFO of the Scheme, the Fund will endeavor to ensure that within a period of three months or the end of the succeeding calendar quarter from the close of the NFO of the Scheme, whichever is earlier, the Scheme complies with these two conditions. In case the Scheme / Plan(s) does not have a minimum of 20 investors in the stipulated period, the provisions of Regulation 39(2)(c) of the SEBI (MF) Regulations would become applicable automatically without any reference from SEBI and accordingly the Scheme / Plan(s) shall be wound up and the units would be redeemed at applicable NAV. The two conditions mentioned above shall also be complied within each subsequently calendar quarter thereafter, on an average basis, as specified by SEBI. If there is a breach of the 25% limit by any investor over the quarter, a rebalancing period of one month would be allowed and thereafter the investor who is in breach of the rule shall be given 15 days notice to redeem his exposure over the 25 % limit. Failure on the part of the said investor to redeem his exposure over the 25 % limit within the aforesaid 15 days would lead to automatic redemption by the Mutual Fund on the applicable Net Asset Value on the 15th day of the notice period. The Fund shall adhere to the requirements prescribed by SEBI from time to time in this regard.
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As per Circular number SEBI/IMD/CIR NO 10/22701/03 dated December 12, 2003, the above guidelines are not applicable for Exchange Traded Funds. As R*Shares Gold ETF is an exchange traded fund, same is not applicable.

C) SPECIAL CONSIDERATIONS
Market Risk : Mutual funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. The NAV of the Scheme will react to the prices of gold, Gold Related Instruments and stock market movements. The Unit holder could lose their investments money over short periods due to fluctuation in the NAV of the Scheme in response to factors such as economic and political developments, changes in interest rates and perceived trends in stock prices market movements, and over longer periods during market downturns. Additionally, the prices of gold may be affected by several factors such as global gold supply and demand, investors expectations with respect to the rate of inflation, currency exchange rates, interest rates, etc. Crises may motivate large-scale sales of gold, which could decrease the domestic price of gold. Some of the key factors affecting gold prices are : Central banks sale : Central banks across the world hold a part of their reserves in gold. The quantum of their sale in the market is one of the major determinants of gold prices. A higher supply than anticipated would lead to subdued gold prices and vice versa. Central banks buy gold to augment their existing reserves and to diversify from other asset classes. This acts as a support factor for gold prices.

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Producer mining interest : Bringing new mines on-line is a time consuming and at times economically prohibitive process that adds years onto potential supply increases from mining production. On the other hand, lower production has a positive effect on gold prices. Conversely excessive production capacities would lead to a downward movement in gold prices as the supply goes up.

Macro-economic factors : A weakening dollar, high inflation, the massive US trade deficits all act in favor of gold prices. The global trend of rising interest rates also had a positive impact on gold prices. Gold being regarded as a physical asset would lose its luster in a deflationary environment as gold is used effectively as an inflation hedge. Geo political issues : Any uncertainty on the political front or any war-like situation always acts as a booster to gold prices. The prices start building up war premiums and hence such movements. Stable situations would typically mean stable gold prices. Seasonal demand : Since the demand for Gold in India is closely tied to the production of jewellery pices tend to increase during the times of year when the demand for jewelry is the greatest, the demand for metals tends to be strong a few months ahead of these festive seasons, especially Dussera, Diwali, Akshaya Trithya festival and summer wedding season in in India. Christmas, Mothers Day, Valentines Day, are also major festive and shopping for Gold. Change in duties & levies : The gold held by the Custodian of R*Shares Gold ETF may be subject to loss, damage, theft or restriction of access due to natural event or human actions. The Trustees may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed and recovery may be limited, even in the event of fraud, to the market value of gold at the time the fraud is discovered.
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The custodian will maintain adequate insurance for its bullion and custody business. The liability of the Custodian is limited under the agreement between the AMC and the Custodian which establish the Mutual Funds custody arrangements, or the custody agreements. Market Trading Risks : Absence of Prior Active Market: Although Gold ETF units described in this Scheme information document are to be listed on the Exchange, there can be no assurance that an active secondary market will develop or be maintained. Lack of Market Liquidity : Trading in Gold ETF on the Exchange may be halted because of market conditions or for reasons that in the view of the market authorities or SEBI, trading in Gold ETF is not advisable. In addition, trading in Gold ETF is subject to trading halts caused by extraordinary market volatility and pursuant to Stock Exchange(s) and SEBI circuit filter rules. There can be no assurance that the requirements of the market necessary to maintain the listing of Gold ETF will continue to be met or will remain unchanged. R*Shares Gold ETF may suffer liquidity risk from domestic as well as international market. Time lag in procurement/redemption of physical gold : Procurement of gold bars may take upto 1 month in case of adverse shortage of gold bars. It may not be possible to sell gold bar intentionally and may delay redemption depending on the market conditions. Shares Gold ETF may trade at prices other than NAV of Gold ETF may trade above or below its NAV. The NAV of Gold ETF will fluctuate with changes in the market value of Schemes holdings. The trading prices of Gold ETF will fluctuate in accordance with changes in their NAVs as well as market supply and demand of R*Shares Gold ETF. However, given that Gold ETF can be created and redeemed only in Creation Units directly with the fund, it is expected that large discounts or premiums to the NAVs of Gold ETF may not sustain due to arbitrage possibility available. Operational Risks :
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Gold ETF are relatively new product and their value could decrease if unanticipated operational or trading problems arise. Regulatory Risk : Any changes in trading regulations by the Exchange or SEBI may affect the ability of Authorised Participants arbitrage resulting into wider Premium / discount to NAV. Although Gold ETF are proposed to be listed on Exchange, the AMC and the Trustees will not be liable for delay in listing of Units of the Scheme on Exchange / or due to connectivity problems with the depositories due to the occurrence of any event beyond their control. Political Risks : Whereas the Indian market was formerly restrictive, a process of deregulation has been taking place over recent years. This process has involved removal of trade barriers and protectionist measures, which could adversely affect the value of investments. It is possible that the future changes in the Indian political situation, including political, social or economic instability, diplomatic developments and changes in laws and regulations could have an effect on the value of investments. Expropriation, confiscatory taxation or other relevant developments could affect the value of investments. Competition Risks : An investment in Gold ETF may be adversely affected by competition from other methods of investing in gold. The value of the units relates directly to the value of the gold held by the scheme and fluctuations in the price of gold could adversely affect investment value of the units. Gold ETF is designed to mirror as closely as possible the performance of the price of gold bullion and the value of units directly relate to the value of the Gold held by the Scheme less the Schemes liabilities (including accrued but unpaid expenses). Gold prices have been quite volatile historically. Based on the London LBMA AM Fix,

Several factors may affect the price of gold, including


Global gold supplies and demand, which is influenced by factors such as forward selling by gold producers, purchases made by gold producers to unwind gold hedge positions, central bank purchases and sales, and
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productions and cost levels in major gold producing countries such as the South Africa, the United States and Australia. Investors expectations with respect to the rate of inflation; Currency exchange rates; Interest rates; Investment and trading activities of hedge funds and commodity funds; and Global or regional political, economic or financial events and situations. In addition, investors should be aware that there is no assurance that gold will maintain its long-term value in terms of purchasing power in the future. In the event that the price of gold declines, the value of investment in units is expected to decline proportionately. Changes in indirect taxes like custom duties for import, sales tax, VAT or any other levies will have an impact on the valuation of gold and consequently the NAV of the scheme. Although, the objective of the Fund is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold and Gold related securities, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors.

Credit & Interest Rate Risk : The Fund may also invest in Gold Related Instruments, money market instruments, bonds, securitised debts & other debt securities as permitted under the Regulations which are subject to price, credit and interest rate risk. Trading volumes and settlement periods and transfer procedures may restrict liquidity in debt investments. Right to Limit Redemptions : The Trustee, in the interest of the Unit holders of the Scheme offered in this Scheme information document and keeping in view of the unforeseen circumstances / unusual market conditions, may limit the total number of Units, which can be redeemed on any Working Day depending on the total Underlying Stock of Gold that can be readily sold in the local market available with the fund. Redemption Risk : The Unit Holders may note that even though this is an open-ended scheme, the Scheme would ordinarily repurchase Units in Creation Unit

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size. Thus unit holdings less than the Creation Unit size can normally only be sold through the secondary market, unless no quotes are available on the Exchange for 2 trading days consecutively. Further, the price received upon the redemption of Gold ETF units may be less than the value of the gold represented by them. The result obtained by subtracting the Funds expenses and liabilities on any day from the price of the gold owned by the fund on that day is the net asset value of the fund which, when divided by the number of units outstanding on that date, results in the net asset value per unit, or NAV. Asset Class Risk : The domestic price of gold may vary from time to time. Further, the returns from the types of securities in which a Scheme invests may under perform returns from the various general securities markets or different asset classes. Different types of securities tend to go through cycles of out-performance and under performance in comparison of the general securities markets. Passive Investments : As Gold ETF is not actively managed, the underlying investments may be affected by a general decline in the domestic price of gold and other instruments invested under the plan. Gold ETF invests in the Gold & securities mentioned in the asset allocation regardless of their investment merit. The AMC does not attempt to take defensive positions in declining markets. Further, the fund manager does not make any judgment about the investment merit nor shall attempt to apply any economic, financial or market analysis. Tracking Error Risk : Tracking error means the variance between daily returns of the underlying benchmark (gold in this case) and the NAV of the scheme for any given period. NAV of the Scheme is dependant on valuation of gold. Gold has to be valued as per the formula provided by SEBI in its circular no. SEBI/IMD/CIR No. 2/65348/06 dated April 21, 2006, Gazeted Notification Dated December 20, 2006 and such other circulars as issued by SEBI from time to time. NAV so computed may vary from the price of Gold in the domestic market. Factors such as the fees and expenses of the Scheme, cash balance, changes to the Underlying assets and regulatory policies may affect AMCs ability to
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achieve close correlation with the Underlying assets of the scheme. The Schemes returns may therefore deviate from those of its Underlying assets. Tracking error could be the result of a various of factors including but not limited to : Delay in the purchase or sale of gold due to Illiquidity of gold, Delay in realisation of sale proceeds, Creating a lot size to buy the required amount of gold The scheme may buy or sell the gold at different points of time during the trading session at the then prevailing prices which may not correspond to its closing prices. The potential for trades to fail, which may result in the Scheme not having acquired gold at a price necessary to track the benchmark price. The holding of a cash position and accrued income prior to distribution of income and payment of accrued expenses. Disinvestments to meet redemptions, recurring expenses, dividend payouts etc. Execution of large buy / sell orders Transaction cost (including taxes and insurance premium) and recurring expenses Realisation of Unit holders funds The scheme will endeavor to minimise the tracking error by Setting off of incremental subscriptions against redemptions, during liquidity window Use of gold related derivative instruments, as and when allowed by regulations Rebalancing of the portfolio.

Given the structure of Gold ETF, the AMC expects the tracking error to be lower. The AMC will endeavor to keep the tracking error as low as possible. Under normal circumstances, such tracking errors are not expected to exceed 2% per annum. However this may vary when the markets are very volatile. Tax Issues : Repurchase of R*Shares Gold ETF by the Fund or sale of R*Shares Gold ETF by the investor on the Stock Exchange may attract short or long term capital gain tax depending upon the holding period of the Units. Moreover, converting R*Shares Gold ETF units to Gold may also attract Wealth tax. The tax benefits described in this Scheme information document are as available under the present taxation laws and are
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available subject to relevant conditions. The information given is included only for general purpose and is based on advice received by the AMC regarding the law and practice currently in force in India and the Unit holders should be aware that the relevant fiscal rules or their interpretation may change. As is the case with any investment, there can be no guarantee that the tax position or the proposed tax position prevailing at the time of an investment or redemption in the Scheme will endure indefinitely. In view of the individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor. Gold is subject to indirect tax not restricted to the following: Sales Tax, Octroi, VAT, Stamp Duty, and Custom Duty. The Mutual Fund is not assuring or guaranteeing that it will be able to make regular periodical distributions/distribute bonus units to its Unit holders though it has every intention to manage the portfolio so as to make periodical income/bonus distributions to Unit holders. Periodical distributions will be dependent on the returns achieved by the Asset Management Company through the active management of the portfolio. Periodical distributions may therefore vary from period to period, based on investment results of the portfolio. Past performance of the Sponsor/ the AMC/ the Mutual Fund is not indicative of the future performance of the Scheme. R*Shares Gold ETF is the name of the Scheme and does not in any manner indicate either the quality of the Scheme; its future prospects or returns. All dividend distributions are subject to the availability of distributable surplus in the Scheme. When an investor switches from this scheme to another scheme on a future date, the scheme specific risk factors applicable to such scheme into which he switches, will apply. Right to Limit Redemption : The Trustee may, in the general interest of the Unit holders of the Scheme under this Scheme Information Document and keeping in view the unforeseen circumstances / unusual market conditions, limit the total number of Units which may be redeemed on any Business Day to 5% of the total number of Units then issued and outstanding under any Scheme / Plan or such other percentage as the Trustee may determine. The Trustee may, at its sole discretion in response to unforeseen circumstances or unusual market conditions including, but not limited to, extreme volatility of the stock, fixed income and money markets, extended suspension of trading on the stock exchanges, natural
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calamities, communication breakdowns, internal system breakdowns, strikes, bandhs , riots or other situations where the Trustee in consultation with RCAM, considers that such suspension is necessary, limit the total number of Units which may be redeemed on any Business Day to 5% of the total number of Units then in issue or such higher percentage as the Trustee may determine in any particular case. Any Units, which by virtue of these limitations are not redeemed on a particular Business Day, will be carried forward for redemption to the next Business Day, in the order of receipt. Redemptions so carried forward will be priced on the basis of the Redemption Price of the Business Day on which redemption is made. Under such circumstances, to the extent multiple redemption requests are received at the same time on a single Business Day, redemptions will be made on pro-rata basis, based on the size of each redemption request, the balance amount being carried forward for redemption to the next Business Day(s).

The Custodian :
The Trustee have to appoint custodian, who have been approved by SEBI to act as Custodian for Mutual Funds including gold exchange Traded. The registration of the Custodian is still valid and effective. The custodian shall hold the custody and possession of the securities and investment of the Fund and will discharge all the functions as are ordinarily discharged by a Custodian. It does not have any power or authority to sell or dispose of or deal with the securities/investment held by it on behalf of the Fund except as instructed by the AMC. The Trustee reserves the right to change the custodian, if required. In terms of Custody Agreement in accordance with SEBI Regulations, entered into with Deutsche Bank as amended from time to time, the Custodian shall, inter alia: Provide post-trading and custodial services to the Mutual Fund; Keep gold, Gold Related Instruments, securities and other instruments belonging to the Scheme in safe custody;

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Ensure smooth inflow/outflow of gold, Gold Related Instruments, securities and such other instruments as and when necessary, in the best interests of the Unit holders; Ensure that the benefits due to the holdings of the Mutual Fund are recovered; and Be responsible for loss of or damage to the gold, Gold Related Instruments, securities due to negligence on its part or on the part of its approved agents. The Custodian will charge the Mutual Fund, portfolio fee, transaction fee and out-of-pocket expenses in accordance with the terms of the Custody Agreement and as per any modification made thereof from time to time.

Role Of The Custodian :


The Custodian is responsible for safekeeping of the Schemes gold deposited with it by an Authorised Participants in connection with the creation of Baskets. The Custodian is responsible for allocating specific bars of gold bullion to the scheme Allocated Account. The Custodian will provide the AMC with regular reports detailing with identifying the gold bars held in the scheme Allocated Account. The Custodian may also from time to time act as Authorized Participants or purchase or sell gold or units for their own account, as agent for their customers and for accounts over which they exercise investment discretion.

Custody Of the Schemes Gold :


Custody of the gold bullion deposited with and held by the scheme is provided by the custodian at its Vaults in Mumbai and other places. The custodian, as instructed by the AMC, is authorized to accept, on behalf of the AMC, deposits of gold. On the instructions given by the AMC, the custodian allocates gold by selecting bars of gold bullion for deposit to the schemes allocated account. The AMC and the custodian enter into the custody agreements, which establish the allocated account. The gold deposited with the scheme is held in the scheme allocated account.
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Under the agreement entered into by the AMC and the custodian, the custodian is responsible for the safekeeping of the gold held on behalf of the AMC. The custodian is responsible for any loss or damage suffered by the scheme as a direct result of any negligence, fraud or willful default in the performance of its duties. The custodians liability is limited to the market value of the gold held in the schemes allocated account at the time such negligence, fraud or willful default is discovered by the custodian, provided that the custodian promptly notifies the AMC of its discovery. In the event of a loss caused by the failure of the custodian to exercise reasonable care, the AMC has the right to seek recovery with respect to the loss against the custodian in breach. Allocated Accounts : An allocated account is an account with a Bank or Custodian, to which individually identified gold bars owned by the account holder are credited. The gold bars in an allocated gold account are specific to that account and are identified by a list which shows, for each gold bar, the refiner, assay or fineness, serial number and fine weight. The account holder has full ownership of the gold bars and, except as instructed by the account holder, the Bank or Custodian may not trade, lease or lend the bars. Transfer of Gold : At the end of each business day gold is transferred to the schemes allocated account. The custodian allocates specific bars of gold from its goldstocks , so that allocated gold bars represent the amount of gold credited to the extent such amount is representable by whole bars. The bars of gold should be held directly by the Custodian. The custodian updates its records at the end of each business day to identify the specific bars of gold allocated to the scheme. The withdrawal of gold from the scheme for the purpose of redemption will follow the same procedure in the reverse order.

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Description Of The Custody Agreements : Reports : The custodian provides the AMC with reports for each business day, no later than the following business day, identifying the movements of gold in and out of the schemes allocated account. The monthly statement contains sufficient information to identify each bar of gold held in the scheme allocated account and the custodian or subcustodian having possession of such bar. Loss / Damage of Physical Gold and Securities : Deutsche Bank will be responsible for loss of / or damage to the physical gold and securities due to fraud, bad faith, negligence, willful neglect, default, or willful default on its part or on the part of its approved agents. Location & Segregation of Gold : Gold held for schemes allocated account by the custodian or sub-custodians appointed by the custodians is held at the custodians Vaults in Mumbai. The custodians books and records will identify every bar of gold held in the schemes allocated account in its own vault by refiner, assay or fineness, serial number and gross and fine weight. The AMC may upon reasonable notice, visit the custodians premises and examine the schemes gold held there and the custodians records concerning the schemes allocated account. The AMCs independent auditors may also visit the custodians premises in connection with their audit of the financial statements of the scheme. Insurance : The custodian will ensure adequate insurance for its bullion and custody business. The AMC and the sponsor may subject to confidentiality restrictions , review this insurance coverage from time to time.

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FEES AND EXPENSES


NEW FUND OFFER (NFO) EXPENSES : These expenses are incurred for the purpose of various activities related to the NFO like sales and distribution fees paid marketing and advertising, registrar expenses, printing and stationary, bank charges etc. As per SEBI circular SEBI/IMD/CIR No.1/64057/06 dated April 4, 2006, open ended schemes are not permitted to charge NFO Expenses to the scheme. ANNUAL SCHEME RECURRING EXPENSES These are the fees and expenses for operating the scheme. These expenses include Investment Management and Advisory Fee charged by the AMC and other expenses as given in the table below: The AMC has estimated that following % of the daily net assets of the scheme will be charged to the scheme as expenses. For the actual current expenses being charged, the investor should refer to the website of the mutual fund. (# Expenses charged under the said parameters shall be in line with the Regulation 52 of SEBI (MF) Regulations or such other basis as specified by SEBI from time to time. ) These estimates have been made in good faith as per the information available to the Investment Manager based on past experience and are subject to change inter-se as per actual but the total expenses shall not exceed the limits permitted by SEBI. Types of expenses charged shall be as per the SEBI (MF) Regulations. The purpose of the above table is to assist the investor in understanding the various costs and expenses that an investor in the scheme will bear directly or indirectly. Mutual funds /AMCs may charge service tax on investment and advisory fees to the scheme in addition to the maximum limit as prescribed in regulation 52 of the SEBI Regulations.

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Service tax on other than investment and advisory fees, if any, shall be borne by the scheme within the maximum limit as per regulation 52 of the SEBI Regulations. Mutual Funds/AMCs will annually set apart at least 2 basis points on daily net assets within the maximum limit as per regulation 52 of the SEBI Regulations for investor education and awareness initiatives. Service tax on brokerage and transaction cost paid for execution of trade, if any, shall be within the limit prescribed under regulation 52 of the SEBI Regulation. However, no Investment Management fees would be charged on investment in the Scheme. The Trustee Company, shall be entitled to receive a sum computed @ 0.05% of the Unit Capital of all the Schemes of RMF on 1st April each year or a sum of Rs.5,00,000/- whichever is lower or such other sum as may be agreed from time to time in accordance with the SEBI Regulations or any other authority, from timeto time. The total expenses of the ETF scheme including the investment management and advisory fee shall not exceed one and one half (1.5%) of the daily net assets as stated in Regulation 52(6).

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LOAD STRUCTURE : Load is an amount which is paid by the investor to subscribe to the units or to redeem the units from the scheme. This amount is used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Load amounts are variable and are subject to change from time to time.I n consultation with the Trustees, reserves the right to change the load structure if it so deems fit in the interest of smooth and efficient functioning of the scheme. Any imposition or enhancement in the load shall be applicable on prospective investments only. However, At the time of changing the load structure: a) The addendum detailing the changes may be attached to Scheme Information Documents and key information memorandum. The addendum may be circulated to all the distributors/brokers . b) Arrangements may be made to display the addendum in the Scheme Information Document in the form of a notice in all the investor service centres and distributors. c) The introduction of the exit load/ CDSC along with the details may be stamped in the acknowledgement slip issued to the investors on submission of the application form. d) A public notice shall be given in respect of such changes in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated. Applicable Load Structure : Entry & Exit Load: NIL There will be no entry/exit load on R*Shares Gold ETF bought or sold through the secondary market on the NSE/BSE.. In case, there are no quotes on the NSE and BSE for five trading days consecutively, an investor can sell directly to the fund with an exit load

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of 5% of NAV. The payout of such redemptions will be on the respective pay-out day.

Gold ETF Creation of Units and NAV

NAV Information: The NAV of the Scheme will be calculated and declared by the Fund on every Working Day by 8.00 p.m. The information on NAV may be obtained by the Unitholders, on any day from the office of the AMC / the office of the Registrar in Hyderabad or any of the other Designated Investor Service Centres. The NAV shall be published in two daily newspapers on a daily basis as per the Regulations. Investors may also obtain information on the purchase /sale price for a given day on any Working Day from the office of the AMC / the office of the Registrar in Hyderabad/ any of the other Designated Investor Service Centres.

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Gold ETFs Listed on Exchanges :


A gold exchange-traded fund (or GETF) is an exchange-traded fund (ETF) that aims to track the price of gold. Gold ETFs are units representing physical gold which may be in paper or dematerialised form. These units are traded on the Exchange like a single stock of any company. Gold ETF's are intended to offer 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 a stock exchange. Objective : To provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors.

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Gold ETF Turnover As on Dec 18, 2013

Gold ETFs Performance

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Top Three Gold ETFs in India are,

Performance Report as on 18 Dec, 2013.

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Suggestion: There are number of investment avenue available to invest in Gold i.e. through physical Gold, Jewellery , Gold Coins, Gold Bars, Multi commodity exchange (MCX),Gold ETF. But out of all this avenue one of the best investment option to invest in Gold is through Exchange Traded Fund (ETFs). Findings : Benefits of Investing Gold ETF

Conclusion : Gold ETF is unique way of investing of in Gold. Its a Low cost product. Provide good transparency as Trading happens under regulation of Exchanges i.e. NSE and BSE. Provides more consistency compare to that of when you buy and sell physical gold across jewellers or banks.

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Its is safe guarded in an electronic form. In all over the world including India this unique way of investment in Gold are very well accepted.

Bibliography : Data has been collected from below given Sites, http://www.nseindia.com http://www.bseindia.com http://www.valueresearchonline.com http://en.wikipedia.org http://www.investopedia.com http://economictimes.indiatimes.com

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