GOLD ETFs and YOU

April 24,2012

Market which is deep Gold as an asset class in Indian culture, has got a significance Indsite: rooted and rare. It is believed to be the symbol of the Hindu goddess Lakshmi and is considered as auspicious. Indians have always been passionate about Gold and it is often considered as holy, a symbol of purity, beauty and prosperity; some also believe that it brings good luck. Most Indians possess gold in some form or the other and as such, the precious metal is customarily bought on achieving lifes important milestones like marriage, child birth, and religious ceremonies amongst other occasions.

Investment positives for Gold as an Asset Class:

Gold has historically been a hedge against inflation; hence it acts as a store of value. Gold helps in preserving the value of money during times of currency weakness. Gold is seen as a safe haven in times of uncertainty. Changes in the price of Gold have low or negative correlation with changes in the price of mainstream financial assets; thus the yellow metal also serves as a good mode of portfolio diversification. Gold is less volatile than most commodities and many equity indices.

Investors can take exposure to Gold through various means like buying gold bars or coins from Jewelers or Banks, Jewelry, Gold Futures, and Gold Exchange Traded Funds (ETFs). In this note, we highlight how Indian investors can invest in Gold via ETFs and also why investments in Gold through the ETF route score over other forms of investment across various aspects like pricing, storage & security, taxation, liquidity, etc.

What are Gold ETFs?

Market Indsite:

Gold backed Exchange Traded Funds are regulated financial products which are designed to provide investors with exposure to the price performance of spot gold bullion. The ETF units are traded on the exchange like stocks of a company. Gold ETFs provide investors with a cost-efficient and secure way to participate in the gold bullion market without the necessity of taking physical delivery of gold. SPDR Gold Shares, launched in 2004 and originally traded on the New York Stock Exchange, is the worlds largest and most liquid physical gold bullion backed ETF.

Gold ETFs in India

Indians have been investing in Gold for ages now; however investing through the ETF route is a new phenomenon. Benchmark Mutual Fund was the first AMC to launch a Gold ETF in India - Gold BeEs in February 2007. Since then, 14 fund houses have launched Gold ETFs. The category has seen its AUM increasing substantially from 96 Crores in March 2007 to 9,866 Crores in March 2012, representing 2% of the mutual fund industry AUM. These ETFs endeavor to generate returns that replicate the performance of the domestic Gold price (subject to tracking error and expenses). In India, a single unit of a Gold ETF is priced at 1 gram of Gold except for Quantum Gold ETF which is priced at gram of Gold.

Flows in Gold ETF - 2011

2011 was another impressive year for global gold demand; volume grew 0.4% to 4067.1 tonnes, worth an estimated US$ 205.5 billion. The gold-backed ETFs that the World Gold Council (WGC) monitors, recorded a demand of 154 tonnes valued at US$ 7783million for 2011 as a whole. ETFs witnessed positive inflows in the fourth quarter of 2011, as demand surged 290% from the relatively subdued level of Q42010. There was a significant increase of inflow into gold ETFs to 86.8t in Q4 2011 valued at US$ 4718 million compared to just 22.3t in Q4 2010 valued at US$ 978 million.

Market Indsite: Benefits of Gold ETFs Comparison of investments in gold via ETFs vis--vis other investment modes Market Indsite:

Pricing: The pricing of Gold ETFs is very transparent and is linked to international gold prices (incl. of VAT). Smaller Denomination: One unit of Gold ETF is equal to 1 gram which is suitable for retail investors Security: Gold ETFs can be held in demat form, hence there are no security or storage issues. . Purity: Gold ETFs invest in Gold sourced from LBMA (London Bullion Market Association) approved refiners. The amount of physical gold held is of fineness (purity) of 995 parts per 1,000, in other words 99.5% pure. Portfolio Diversification: Due to low co-relation with other financial products, it provides diversification benefits to investor portfolios. Low Cost: The cost of buying Gold ETF is very low as compared to other forms of investments in Gold. Liquidity: Investing in Gold ETF provides high liquidity as it can be easily bought and sold through exchanges. Tax Benefit: Holding Gold ETFs for greater than 1 year will qualify for long term capital gains. Wealth Tax: Gold ETFs are exempt from wealth tax Market Indsite: Comparison of investments in gold via ETFs vis--vis other investment modes
Parameters Purchase & Sale mode Security of Asset Transparency Impurity Risk Pricing (for retail investors) Selling back Bid Ask spread Denomination Wealth Tax Long-term Capital Gains tax
*1 unit of Quantum Gold ETF = Gram

Gold ETFs Demat Form Taken care by the Fund House High Nil

Jewelers Bar or Coin/Jewelry Investor's Concern Low May Exist

Banks Bar or Coin Investor's Concern High Nil

Transparent - WillMarketon be traded Indsite: Not standard. Normally high Neither standard nor transparent Exchanges premium to wholesale price. Sell back on exchange Low 1 gram and in multiples of 1 gram * No Applicable after 1 Year Conditional and uneconomical High Available in standard denomination Yes Applicable after 3 Years Usually Restricted. Markup of upto 10-15% possible. Restricted Available in standard denomination Yes Applicable after 3 Years

Comparison of investments in gold via ETFs vis--vis other investment modes Yearly return of gold vis--visMarket asset classes other Indsite:
Y ea r 20 12 (Y TD) 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01
Equity: S&P Nifty, Bond: I-BEX (I-Sec Sovereign Bond Index), Gold: Gold prices in INR

E quity 15 .31 -2 4 .6 2 17 .95 75 .76 -5 1 .7 9 54 .77 39 .83 36 .34 10 .68 71 .9 3.25 -1 6 .1 8

Bond 3.52 6.27 6.25 -5 .97 27 .13 6.89 6.01 6.26 -1 .43 12 .37 22 .97 25 .26

G old 3.1 3 3 0.74 24 .5 18 .9 30 .6 16 .6 21 22 .2 0.5 13 .5 24 .1 5.9

Comparison of investments in gold via ETFs vis--vis other investment modes Performance of Gold ETFs * Market Indsite:
Absolute Scheme Name Axis Gold ETF Birla SL Gold ETF Canara Robeco Gold ETF GS Gold BeES HDFC Gold ETF ICICI Pru Gold ETF IDBI Gold ETF IDBI Gold ETF Motilal Oswal Most shares Gold ETF Quantum Gold ETF Reliance Gold ETF Religare Gold ETF SBI Gold ETF UTI Gold ETF
*Performance as on 25 March 2011; AUM as on end of February 2011

CAGR 6 Months 8.95 8.87 8.94 8.99 8.93 9.59 9.02 8.99 9.02 9.04 9.03 1 Year 34.31 3 Years

AUM 243.28 64.39 1.54 2967.88 567.13 157.86 92.12 915.71 3.44 51.69 2651 43.58 1047.06 667.24

3 Months 3.88 3.86 3.88 3.9 3.88 3.88 3.9 3.94 3.9 3.92 3.92 3.92

34.24 34.6 34.36 34.77 34.9 34.9 34.84 34.87 34.9

21.95

22 22.05 22.1

22.11

Market Comparison of investments in platformIndsite: Gold ETFs available on our gold via ETFs vis--vis other investment modes
Scheme Name Axis Gold ETF Birla Sun Life Gold ETF Canara Robeco - Gold ETF Gold BeES HDFC Gold ETF ICICI Pru Gold ETF IDBI Gold ETF Kotak GOLD ETF Motilal Oswal Mutual Fund Quantum Gold ETF Reliance Gold ETF Religare Gold ETF SBI Gold ETF UTI Gold ETF AMC Axis Mutual Fund ISIN INF846K01347 Pricing (1 Unit) 1 Gram 1 Gram 1 Gram 1 Gram 1 Gram 1 Gram 1 Gram 1 Gram 1 Gram 1/2 Gram 1 Gram 1 Gram 1 Gram 1 Gram

Birla Sun Life Market Indsite: INF209K01HT2 Mutual Fund Canara Robeco Mutual Fund INF760K01BR1 Goldman Sachs Mutual Fund HDFC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund Kotak Mutual Fund Motilal Oswal MOSt Shares Gold ETF Quantum Mutual Fund Reliance Mutual Fund Religare Mutual Fund SBI Mutual Fund UTI Mutual Fund INF732E01102 INF179K01CN1 INF109K01FV4 INF397L01554 INF373I01015 INF247L01072 INF082J01010 INF733I01010 INF205K01361 INF200K01099 INF789F01059

Sources: World Gold Council, Benchmark MF, NSE India, Bloomberg , ACE MF, ASSL Research
3

RETAIL RESEARCH TEAM

Disclaimer : The information contained herein is taken from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Neither Axis Securities and Sales Limited (AxisDirect) nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The tax implications provided herein above should not be used in any actual transaction without the advice and guidance of a Professional Tax Adviser. Although the information on tax implications are presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice either express or implied. Mutual Fund Investments are subject to market risks. Please read the offer and scheme related documents carefully before investing. The report and information contained herein is of confidential nature and meant only for the selected recipient and should not be altered in any way, transmitted to, copied or distributed, in any manner and form, to any other person or to the media or reproduced in any form, without prior written approval of Axis Securities and Sales Limited (hereinafter referred to as 'ASSL'). The material in this document/report is based on facts, figures and information that are consider true, correct, reliable and accurate but ASSL does not guarantee or represent (expressly or impliedly) that the same are true, correct, reliable and accurate, not misleading or as to its genuineness, fitness for the purpose intended and it should not be relied upon as such. The opinion expressed (including estimates, facts, figures and forecasts) is given as of the date of this document is subject to change without providing any prior notice of intimation. ASSL shall have the rights to make any kind of changes and alterations to this report/ information as may be required from time to time. However, ASSL is under no compulsion to maintain or keep the data/information updated. The information appearing herein is obtained from publicly available media or other sources believed to be reliable, but ASSL does not guarantee that it is complete or accurate and it should not be relied on as such. This report/document does not mean an offer or solicitation for dealing (purchase or sale) or as an official confirmation of any transaction. ASSL or any of its affiliates/ group companies shall not be answerable or responsible in any way for any kind of loss or damage that may arise to any person due to any kind of error in the information contained in this document or otherwise. This document is provided for assistance only and should not be construed as the sole document to be relied upon for taking any kind of investment decision. The recipient is himself/herself fully responsible for the risks of any use made of this information. Each recipient of this document should make his/her own research, analysis and investigation as he/she deems fit and reliable to come at an independent evaluation of an investment mentioned in this document (including the merits, demerits and risks involved), and should further take opinion of own consultants, advisors to determine the advantages and risks of such investment. The investment discussed or views expressed herein may not suit the requirements for all investors. ASSL and its group companies, affiliates, directors, and employees may be engaged in any other transaction involving investment and earn commission/brokerage or other compensation or act as advisor to Mutual fund/AMC or have other potential conflict of interest with respect to any recommendation and related information and opinions. The applicable Statutory Rules and Regulations may not allow the distribution of this document in certain jurisdictions, and persons who are in possession of this document, should inform themselves about and follow, any such restrictions. This report is not meant, directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would not be in conformation to the law, regulation or which would require ASSL and affiliates/ group companies to obtain any registration or licensing requirements within such jurisdiction. Neither ASSL nor any of its affiliates, group companies, directors, employees, agents or representatives shall be held responsible, liable for any kind of consequential damages whether direct, indirect, special or consequential including but not limited to lost revenue, lost profits, notional losses that may arise from or in connection with the use of the information. Prospective investors and others are cautioned and should be alert that any forward-looking statements are not predictions and may be subject to change without providing any notice. Past performance should not be considered as a reference to future performance. The disclosures of interest statements if any included in this document are provided only to enhance the transparency and should not be construed as confirmation of the views expressed in the report. The views expressed in this report reflect the personal views of the author of the report and do not reflect the views of ASSL or any of it's associate and group companies about the subject mutual fund/scheme. Neither Axis Securities & Sales Limited nor the author of this report nor his/her dependent family members have any interest or long or short position in the securities/Mutual fund/schemes discussed in this report.
Axis Securities and Sales Limited, SEBI Reg. No.-NSE(CM)-INB231387235,(F&O)-INF231387235,(CDS)-INE231387235,BSE(CM)-INB011387330,(F&O)-INF011387330, ARN No. 51485, Main/Dealing off.- Solaris, C Bldg., 4th & 6th floors, Opp. L&T Gate No. 6, Saki Vihar Road, Powai, Mumbai-400072, Tel No. 18001030808, Reg. off.- Axis House, 8th Floor, Bombay Dyeing Mills Compound, Pandurang Budhkar Marg, Worli, Mumbai 400 025.