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Factors affecting gold (globally) and gold ETFs as an investment option .I have tried to give a detailed description about the factors which moves gold prices globally. Moreover I had put some light on mutual fund and ETFs as an investment option. I will also try to show the different ETFs launched till date.
My project topic focuses on gold be it the factors which moves the gold prices or gold as an investment option.
Hence, the objectives summed up are:
- Study about different schemes of SBIMF.
- To explain why Gold is considered as a hedge against inflation?
- The demand and the supply of gold
To study Investment in GOLD ETFs and the benefits arrive from ETFs and comparison of different GOLD ETFs launched till date.
It has been tried to identify the pros n cons of investment in gold ETFs and scheme launched by SBIMF (GETS), the purpose for launching the scheme, asset allocation, features and benefits.
LITERATURE REVIEW :-
Now day gold is an important investment option in the world. When world was facing the recession every stock market, countries economy was going down at that time gold show his real value as an investment option over mutual funds, stock market and many other investment. In this assignment I will try to show the factors effecting gold and gold ETF market as an investment option. In the following review is all about the Factors affecting gold (globally) and gold ETFs as an investment option .I have tried to give a detailed description about the factors which moves gold prices globally. Moreover I will put some light on mutual fund and ETFs as an investment option. I will also try to show the different ETFs launched till date. I will also put some light on mutual funds and various schemes launched in the market particularly GOLD ETFs. I am going to identify and analyse the factors which moves the gold prices in a global context while on the other hand I was also required to put some light on GOLD ETFs as an investment option and the perspective of individuals towards it. The features which attract investors before investing in any specific schemes are its tax-efficient returns ,liquidity and efficient diversification.
WHAT IS MUTUAL FUNDS ?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fundissues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.
DIFFERENT TYPES OF MUTUAL FUND SCHEMES-
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier.
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes.However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
What is Systematic Investment Plan ?
For as little as Rs. 250 each month for 12 months or Rs. 500 every month for 6 months, you can purchase mutual fund units and avoid larger minimum investment amounts of over Rs. 1,000. Fixed amounts can be invested in Mutual Funds each month using funds drawn automatically from your savings account regularly.
Investing in SBIMF’s Systematic Investment Plan (SIP) offer the benefit of “Rupee-cost averaging”, i.e., by purchasing Mutual Fund units over a period of time, you automatically buy more units when prices are low and fewer units when prices are high, resulting in lower “per unit acquiring cost” as a result of averaging.
Aren’t mutual funds risky investments?
Mutual funds offer a variety of schemes ranging from relatively safe debt funds like Magnum Income Fund and gilt funds like Magnum Guilt Fund to very risky sectoral funds like Magnum Sector Funds Umbrella. Investors can choose schemes best suited to their risk appetite. Debt funds and gilt funds, which invest only in fixed-income instruments, are relatively safe and offer returns equivalent to returns on pure Debt instruments, when held for atleast a year. Sectoral funds, such as IT Funds, Pharma Funds, etc can offer very high returns when the stock markets are bullish, but these are high risk products and can also result in a loss on capital when the markets are bearish.
HISTORY OF GOLD –
One of the oldest civilisations known to man, the Sumerians of Mesopotamia, who lived in what is modern-day Iran and Iraq, first used gold as sacred, ornamental, and decorative instruments in the fifth millennium B.C. Around the same period, the early Egyptians —the richest gold-producing civilisation of the ancient world — began the art of gold refining.
The first large-scale, private issuance of pure gold coins was under King Croesus (560-546 B.C.), the ruler of ancient Lydia, modern-day western Turkey. Stamped with his royal emblem of the facing heads of a lion and a bull, these first known coins eventually became the standard of exchange for worldwide trade and commerce.
For a forty-year period there were no changes in the exchange rates of the United States, UK, Germany, and France. There were few barriers to gold shipments and few capital controls in the major countries. Capital flows generally seem to have played a stabilising, rather than destabilising, role. After the outbreak of the First World War, one combatant country after another suspended gold convertibility, and floating exchange rates prevailed.Most currencies experienced substantial devaluations against the dollar; the U.S. currency had greatly improved its competitive strength over European currencies during the war, in line with the strengthening of the relative position of the U.S. economy.
In Europe, especially in the UK, there was a widespread desire to return to the stability of the gold standard, and a worry about the growing attractiveness of the dollar—which was convertible into gold—and of dollar-denominated assets.
In 1971 President Richard Nixon ended US dollar convertibility to gold and the central role of gold in world currency systems ended. The dollar and gold floated and in January 1980 the gold price hit a record of $850 per ounce against a background of an international crisis arising from the Soviet invasion of Afghanistan and the Islamic Revolution in Iran. In 2006 dollars, the all-time record price would be $2100
WHAT MOVES GOLD PRICES ?
Tightening of gold supply
Gold supply has decreased by almost 40 per cent as the cost of mining, legal formalities and geographical problems have increased which has led to a fall in gold mining. Economics have taught us that lesser the supply, greater the demand and in turn greater the increase in price.
Inflation and interest rates
Rising inflation rates typically appreciates gold prices. It has an inverse relationship with interest rates. As gold is pegged to the US dollar, US interest rates affect gold prices. Whenever interest rates fall, gold prices increase. Lowering interest rates increases gold prices as gold becomes a better investment option vis-à-vis debt products that earn lower interest. Gold loses its shine in a rising interest rate scenario.
As gold is pegged to the US dollar, it has an inverse relationship with the dollar. Dollar is a de-facto currency of exchange around the world. But now with US on the brink of depression, gold is substituted as a safe haven for investments. Though dollar seems to be getting stronger, it may be a temporary effect and very soon it can head southwards once again, in turn making gold an attractive and safe investment.
Whenever there is geo-political strife, investors around the world rush to prevent erosion of their investments and gold as a safe haven attracts one and all. For example after 9/11 terror strike in the United States the demand for gold had increased. With the recent events like tension between India-Pakistan, Israeli strikes over Gaza, the ongoing war in Iraq, the tension between US and Iran coupled with recession have investors scrambling for gold.
Central bank demand
With the dollar losing its value, central banks of most of the developed countries have started to increase their share of gold. This explains the increasing market demand for gold.
Weakness in financial markets
General rule of thumb in the market is that gold is always attractive when all other investments are unattractive. Why is this? As gold is negatively co-related to stocks, bonds, and real estate, gold is considered to be a safe haven and hence during any crises, investors would like to sell off what they would term as risky investments and be invest the funds in gold.
Growth in Demand for Jewelry
Countries which are primarily responsible for this growth are India, China, Italy, Turkey and the USA. The demand for consumption of gold in jewelry was 6% higher at 735 tonnes and also comprised a new first-quarter record. The US, which accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a renaissance.
The Indian market – the world’s largest for gold demand – was 23 % higher following the marriage and festival period which, in turn, has led to restocking by retailers. The earthquake in India, however, is unlikely to hit demand significantly as it occurred in an area which comprises only 5% of the total Indian consumption. There were sharp falls in demand in Turkey and Taiwan – down 38% and 31% respectively. This was due to economic difficulties and continued weakness in investment demand.
GOLD IS MONEY…..
therefore a hedge against inflation and deflation
First of all, gold is money; it is not like other commodities that we use mostly in production, consumption etc. One of money’s main functions is to store wealth. We therefore earn money, we hoard it, we guard it and then we exchange it for assets when needed.
Gold is the premier store of wealth that this world has known for the last 3000 plus years. Even the fact that gold is not the official currency in the countries of the world has not changed this fact. I know of no place in the world, now or many years before, where gold is not known and not highly valued.
So in summary, gold is money and it derives its usefulness from being money and therefore people dig it out, melt it down and guard it like they would guard money.
WHAT ARE EXCHANGE TRADED FUNDS ?
ETFs represent shares of ownership in either fund, unit investment trusts, or depository receipts that hold portfolios of common stocks which closely track the performance and dividend yield of specific indexes, either broad market, sector or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities. While similar to an index mutual fund, ETFs differ from mutual funds in significant ways. Unlike Index mutual funds, ETFs are priced and can be bought and sold throughout the trading day. Furthermore, ETFs can be sold short and bought on margin.
WHAT ARE GOLD ETFs?
Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investor’s holding will be denoted in units, which will be listed on a stock exchange.
These are passively managed funds and are designed to provide returns that would closely track the returns from physical gold in the spot market. An investor can buy and redeem the units either directly from the mutual fund, subject to certain stipulations, or from the stock exchange.
SBI GETS SCHEME –
Gold as an Asset Class has given comparatively good returns over the years. To cater to the investor’s growing need of investing in gold SBI MF have come out with an offering of a Gold ETF. We are launching our Gold ETF New Fund Offer – “SBI Gold Exchange Traded Scheme (SBI GETS)” from 30/3/2009. The New Fund Offer is open from 30/3/2009 to 28/04/2009. Here is an opportunity for you to invest in Gold and hold it in a secure and convenient demat form.
Features of SBI GETS:
1. 1unit of SBI GETS is equivalent to approximately 1gm of gold .
2.Minimum initial investment is Rs. 5000/- and in multiples of Re. 1/- thereafter with no upper limit
3.Post NFO and listing, SBI GETS units can be easily traded like a security on the National Stock Exchange
4.NAV would be declared on every business day
Benefits of SBI GETS:
Cost effective – No making charges and premia, as incurred in Jewellery and physical gold
Secure – Each unit is backed by physical Gold held in secured vaults
Smaller unit size – You can invest in as low as one unit of SBI GETS i.e. approximately equal to one gram of Gold.
Assured Purity – Scheme will invest in physical gold of 995 fineness procured from LBMA approved miners
Minimum Investment amount will be Rs.5000 and in multiples of Re.1 thereafter.
SOURCES OF DATA:
Research will be a combination of qualitative and quantitative methods.
The reason for choosing Interview as a research method is because through interview it is possible to know the in depth of the organization. Interview is a great tool to unfold the various aspects relating to human resource, organization structure, process related issues, etc. There are many types of interview methods personal, telephonic, structured, Unstructured, focused, qualitative and quantitative, etc. The interview will be helpful in getting data from managers and executives regarding different aspects of organization and industry as a whole. (Stewart & Cash,1997 Pg.1) define interview as, “an interactional communication process between two parties, at least one of them has a predetermined and serious purpose, and usually involves the asking and answering of questions”. Interview needs to be accurate, not bias and should be confidential. I will try to Interview many firms director or manager regarding the investment option and gold ETF market in India. I have my some relatives or friends in State Bank of India and in some big investment firms which be helpful as a reason of Investment.
Questionnaire is one of the methods of collecting quantitative data. A questionnaire will be sent to the back-office in India and the head office here in the UK as per the informal approval from process managers, this will be of great importance as it will be easy to analyze the difference in culture of two nations, and solutions to minimize that gap, and to find out various issues of Outsourcing. Questionnaire is a flexible means to collect large information from a large segment quickly. Data relating to investment option, amount of investment, time of investments will be try to get by questionnaire. It is the means to target the people who are expected to read and accordingly reply their views on the issue. Questionnaire shouldn’t be too long. Questionnaire should clearly mention the objectives of the research as to why it is being carried on. In questionnaire there is no bias, it is easy to analyze, and cost effective. Questionnaire should clearly mention goals, which makes design of questionnaire simple.
It’s about processing, interpretation and analysis of data. Qualitative data is all about elucidation of text, where as Quantitative data is elucidation of numeric data. Being personally involved in the research through the mode of interview, research work will be based on primary data hence it will be qualitative method. Though, quantitative method will also be implemented as both methods are useful for collecting data in different ways. Through interview much knowledge about the international business, competitive threats, strategies being used, employee satisfaction, culture diversity will be derived. Quantitative method will be used in the form of Questionnaire. Questionnaire will investigate on the issues related to employee satisfaction, motivation, etc. After getting the detailed information about the organisation different theories will be evaluate and all the findings will be examined based on that data.
Time allotment is done in accordance to the time table
Timetable for Activity
Dates for work
5 October 2009 – 10 October 2009
11 October 2009 – 26 October 2009
27 October 2009 – 3 November 2009
Choice of Methodology
4 November 2009 – 10 November 2009
11 November 2009 – 20 November 2009
21 November 2009 – 27 November 2009
28 November 2009 – 4 December 2009
Writing up Draft
5 December 2009 – 15 December 2009
16 December 2009 – 25 December 2009
26 December 2009 – 5 January 2009
Binding of Document
6 January 2009 – 15 January 2009
The features which attract investors before investing in any specific schemes are its tax-efficient returns,liquidity and efficient diversification. It is also identified that gold moves generally in tandem with crude as latter signals inflation, while gold is a hedge against it. It generally has inverse relation with dollar as the two compete for investments. The research is in it’s preliminary stage and the complete research work will be done to get the conclusion.
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