Performance Evaluation of Gold ETF

Undertaken at Kotak Securities Ltd

Nithish Sebastian

USN: 4MT10MBA 34

Company Profile

Theoretical Background

SWOT Analysis

Learning Experience

Study Objectives

Research Design

Analysis and Interpretation

Observations

Major Findings of the Study

Conclusion

Contents

Company Profile:

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.

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 IPO’s and Mutual Funds On the Phone

Mobile Application to Track Portfolio of your Investments in Stock Market.

Products or Services:

Theoretical Background What is Gold ETF?

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

CustodianETF Sponsor

Demat A/ct of 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

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

Working of Gold ETF – Ongoing:

Buyer

Seller

Stock Exchange

Authorized Participants or Large Investors

ETF Sponsor

Creation of units in exchange of physical gold

Redemption of units in exchange of physical gold

Cash

Cash

Secondary Market

Market making or Arbitrage

Buy or Sell

Custodian

ETF Units

ETF Units

Deposit the physical gold

Transferring physical gold in case of redemptions

Primary Market

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 IPO’s.

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 ExperienceEnhance 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 investor’s perception towards Gold ETF

The researcher’s 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 practical and better.

Objectives of the Study:

To study the concept of Gold Exchange Traded Fund (GETF).

To evaluate the performance of Gold ETF vis-à-vis MCXCOMDEX index.

Research Design

Methodology

Data collection

Statistical measure

Sample size

Limitations of the Study

Analysis and Interpretation

Financial Year2008 

SymbolReturns

(%)

 σ

 Beta

 Alpha

(%)

 Sharpe

Ratio

 Treynor’s

Ratio

Jensen’s Alpha (%)

GOLDBEES 

25.58 

1.75 0.56 0.19

     

 GOLDSHARE

26 1.77 0.51 0.18

     

 KOTAKGOLD 25.56 1.71 0.52 0.18

     

 RELGOLD

23.54 1.77 0.54 0.18

     

Market

(MCXCOMDEX) -35.96 1.71 1

     0

(Default)

Financial Year 2009 

SymbolReturns

(%)

 σ

 Beta

 Alpha(%)

 Sharpe

Ratio

 Treynor’s

Ratio

Jensen’s

Alpha (%)

GOLDBEES 

23.86 

1.14 0.12 0.07

     

 GOLDSHARE 24.05 1.09 0.11 0.07

     

 KOTAKGOLD 23.39 1.13 0.10 0.07

     

 RELGOLD 23.72 1.16 0.13 0.07

     

 QGOLDHALF

22.59 1.19 0.10 0.07

     

 Market

(MCXCOMDEX) 56.44 1.63 1

     0 (Default)

Financial Year2010 

SymbolReturns

(%)

 σ

 Beta

 Alpha(%)

 Sharpe

Ratio

 Treynor’

sRatio

Jensen’s Alpha (%)

GOLDBEES 

20.53 

0.84 0.38 0.05

     

 GOLDSHARE 20.55 0.80 0.35 0.06

     

 KOTAKGOLD

20.62 0.81 0.35 0.06

     

 RELGOLD 20.44 0.83 0.31 0.06

     

 QGOLDHALF 20.27 0.80 0.34 0.06

     

 SBIGETS 20.20 0.85 0.34 0.06

     

Market (MCXCOMDEX)

18.20 0.90 1

     0 (Default)

 Financial Year2011

 Symbol Returns (%)  σ  Beta  Alpha (%) Sharpe Ratio

 Treynor’sRatio

JensenAlpha (%)

GOLDBEES  27.95  1.21 0.50 0.08      

 GOLDSHARE 27.74 1.19 0.44 0.08      

 KOTAKGOLD 28.43 1.20 0.49 0.08      

 RELGOLD 28.75 1.20 0.49 0.08      

 QGOLDHALF 28.24 1.19 0.46 0.08      

 SBIGETS 28.51 1.26 0.36 0.09      

 RELIGAREGO 27.83 1.21 0.46 0.09      

 HDFCMFGETF 27.41 1.24 0.43 0.09      

 IPGETF 27.20 1.26 0.48 0.08      

 AXISGOLD 27.33 1.17 0.41 0.09      

Market 16.23 1.06 1     0

(Default)

Gold ETF’s Launched in the FY 2011

Symbol MonthsReturns

(%)σ Beta Alpha

(%)

BSLGOLDETF 1st June 2011 – 31st Dec 2011 19.51 1.63 0.57 0.10

IDBIGOLD

1st Dec 2011 – 31st Dec 2011

-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, Jensen’s Alpha on Gold ETF’s were positive which indicates that Gold ETF’s 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 UTI’s 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

 Rank

 Treynor’s

Ratio

 Rank

Jensen’s Alpha (%)

 Rank

 GOLDBEES

   III

   III

   I

 GOLDSHARE

   II

   I

   IV

 KOTAKGOLD

   I

   II

   II

 RELGOLD

   IV

   IV

   III

 MCXCOMDEX

(Market)

   V

   V

 0

(Default)

 V

 

Financial Year (FY) 2009

 Symbol

 Sharpe Ratio

 Rank

 Treynor’sRatio

 Rank

Jensen’s Alpha (%)

 Rank

 GOLDBEES

   III

   IV

   III

 GOLDSHARE

   II

   III

   I

 KOTAKGOLD

   IV

   I

   II

 RELGOLD

   V

   V

   V

 QGOLDHALF

   VI

   II

   IV

 MCXCOMDE

X (Market)

   I

   VI

 0 (Default)

 VI

 Financial Year (FY) 2010

 Symbol

 Sharpe Ratio

 Rank

 Treynor’sRatio

 Rank

Jensen’s Alpha (%)

 Rank

 GOLDBEES

   V

   VI

   VI

 GOLDSHARE

   I

   V

   III

 KOTAKGOLD

   II

   III

   II

 RELGOLD

   IV

   I

   I

 QGOLDHALF

   III

   II

   IV

 SBIGETS

   VI

   IV

   V

 MCXCOMDEX

(Market)

   VII

   VII

 0 (Default)

 VII

 Financial Year (FY) 2011

 Symbol  Sharpe Ratio  Rank

 Treynor’sRatio  Rank

Jensen’s Alpha (%)  Rank

 GOLDBEES    VI    X    IX

 GOLDSHARE    IV    IV    V

 KOTAKGOLD    II    VIII    IV

 RELGOLD    I    VII    II

 QGOLDHALF    III    V    III

 SBIGETS    VIII    I    I

 RELIGAREGO    VII    VI    VI

 HDFCMFGETF    IX    III    VIII

 IPGETF    X    IX    X

 AXISGOLD    V    II    VII

 MCXCOMDEX(Market)

   XI    XI 0

(Default)  XI

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 Treynor’s 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 Jensen’s 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.

Thank You……