Background of Stock Exchange in India

7/31/2019 Background of Stock Exchange in India

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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


HDFC Securities


UTI Securities


Religare


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.
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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.
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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.
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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.


38/45

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.


39/45


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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


41/45

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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Background of Stock Exchange in India

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