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PROJECT REPORT On Exchange Traded Funds vs. Index Funds: Comparative Performance Analysis BY SUMIT KUMAR 1NH17MBA79 Submitted to DEPARTMENT OF MANAGEMENT STUDIES NEW HORIZON COLLEGE OF ENGINEERING, OUTER RING ROAD, MARATHALLI, BANGALORE In partial fulfillment of the requirements for the award of the degree of MASTER OF BUSINESS ADMINISTRATION Under the guidance of INTERNAL GUIDE EXTERNAL GUIDE Mr. SHESHU A Mr. HEMANTH. L ASSISTANT PROFESSOR RFP SPECIALIST, SSGA 2017-19 CERTIFICATE This is to certify that SUMIT KUMAR bearing USN NO - 1NH17MBA79, is a bonafide student of Master of Business Administration course of the Institute 2017-19, autonomous program, affiliated to Visvesvaraya Technological University, Belgaum. Seminar report on “Exchange Traded Funds vs. Index Funds: Comparative Performance Analysis” is prepared by him/her under the guidance of Mr. SHESHU A, in partial fulfillment of requirements for the award of the degree of Master of Business Administration of Visvesvaraya Technological University, Belgaum Karnataka. Signature of Internal Guide Signature of HOD Signature of Principal DECLARATION I, Sumit Kumar , hereby declare that the Seminar report entitled “ Exchange Traded Funds vs. Index Funds: Comparative Performance Analysis” with reference to “STATE STREET GLOBAL ADVISORS, Bangalore” prepared by me under the guidance of Mr. SHESHU A , faculty of M.B.A Department, New Horizon College of Engineering. I also declare that this project report is towards the partial fulfillment of the university regulations for the award of the degree of Master of Business Administration by Visvesvaraya Technological University, Belgaum. I have undergone an industry Seminar for a period of Eight weeks. I further declare that this report is based on the original study undertaken by me and has not been submitted for the award of a degree/diploma from any other University / Institution. Signature of Student Sumit Kumar Place: Bangalore Date: ACKNOWLEDGEMENT I take this opportunity to thank Dr. Mohan Manghnani, chairman of New Horizon College of Engineering for providing us excellent infrastructure that is required for the development of our project. I would like to thank Dr. Manjunatha, Principal, for providing us conductive ambience for developing the project. I am also grateful to Dr. Sheehan Misra, HOD, Department of Management Studies, for providing support and encouragement. I would like to express my sincere gratitude to my Project Guide, Mr. SHESHU A, Assistant Professor, Department of Management Studies, for his able assistance, timely suggestions and guidance throughout the duration of the project. I would also like to express my sincere gratitude to STATE STREET GLOBAL ADVISORS, Bangalore Company for providing me an opportunity to work as an Intern and also helped in my project. I also convey my gratitude to all the staff of Department of Management Studies and those who have contributed to this project directly or indirectly. TABLE OF CONTENTS Chapter Title Page number 1 Introduction 1 2 Literature Review 49 3 Research Methodology 55 4 Data Analysis and Interpretation 57 5 Finding, Suggestions and Conclusions 66 6 Bibliography 67 LIST OF TABLES Serial number Table name Page number 1 Annual Returns of Index Funds. 57 2 Annual Returns of Exchange Traded Funds. 58 3 Risk analysis of Index Funds. 59 4 Risk Analysis of Exchange Traded Funds. 60 LIST OF GRAPHS Serial Number Graph Name Page Number 1. Franklin india Index Nifty Plan. 62 2. HDFC Index Fund Nifty Plan 62 3. IDBI Nifty Index Fund 63 4. UTI Nifty Index Fund 63 5. Kotak Nifty ETF 64 6. Aditya Birla Sun Life ETF 64 7. ICICI Prudential Nifty IWIN ETF 65 8. Reliance Equity Nifty BeES 65 EXECUTIVE SUMMARY To do any report on the organization it is necessary to learn about the company in-depth. In this report people will come to know about the organization structure STATE STREET GLOBAL ADVISORS, Bangalore. The performance of the company in the market. SWOT analysis their strengths, weakness, opportunities, threats. Exchange Traded Funds (ETFs) and Index Funds both are innovative products. ETFs are baskets of securities that are traded on the stock exchange. It is a hybrid financial product that bears the twin features of a stock and a mutual fund whereas Index Funds are mutual funds which replicate the performance of broad market index but can be purchased or redeemed only at the end of the day at the value of their net assets (NAV). The proposed study aims to cover the performance evaluation of Indian ETFs and Index Funds which track the same benchmark. Four different index funds along with four different exchange traded funds are considered in the study respectively tracking same benchmark .The study is based on secondary data and covers a period of five years i.e. from 2014-18 for the purpose of evaluating relative performance of selected ETFs and Index Funds. The parameters used for evaluating the performance are: Return, Risk, Sharpe Ratio, Beta, Jensen’s Alpha and R square. This study will enable to recognize the difference in performance of two significant similar passive investment strategies. The project has given us a very good exposure to know the industry and to understand the working of industry. CHAPTER 1 INTRODUCTION 1.1 Concept of Exchange traded funds An Exchange-Traded Fund (ETF) is an investment company whose shares are traded intra-day on stock exchanges at market-determined prices. ETFs enable investors to buy or sell shares on the collective performance of a stock or bond portfolio. ETF is an innovative product which puts together favorable characteristics of open-ended and closed-ended mutual funds and presents a more flexible and liquid product for investors. Over the past decade, demand for ETFs has grown markedly as investors—both institutional and retail—increasingly turn to them as investment options in their portfolios. With the increase in demand, sponsors have offered more ETFs with a greater variety of investment objectives. While ETFs share some basic characteristics with mutual funds, there remain key operational and structural differences between the two types of investment products. An ETF is an investment company, typically a mutual fund or unit investment trust, whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker just as they would buy the shares of any publicly traded company. 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 other stock. An Index Fund is a Mutual Fund that aims to replicate the movements of an index of a specific financial market. An Index Fund follows a passive investing strategy called Indexing. It involves tracking an index say for example, the Sensex or the Nifty and builds a portfolio with the same stocks in the same proportions as the index. The Fund makes no effort to beat the index and in fact it merely tries to earn the same return. Exchange-traded funds (ETFs), which offer flexibility of a stock and protection of a fund, are catching on big time with Indian investors. ETFs, which invest in stocks comprising an index, traded on exchanges. Financial planners are increasingly recommending ETFs to investors who have long-term goals and want to invest in equity without taking too much risk. This is reflected in average assets under management in the retail ETF category, which have risen from Rs 59 crore in March 2009 to Rs 394 crore in March 2012 and finally stood 19,224.82 crores in 18th May 2016 according to the www.moneycontrol.com. Investors are now realizing the benefits of ETF’s and have started to invest in and find value in ETF’s and Index Based Fund. 1.2 ETF v/s Mutual Fund Exchange traded funds are different from mutual funds in a way that ETFs are listed and traded on the stock exchanges, they can be bought and sold throughout the day, whereas mutual funds can be bought and sold at the end of the day at the fund’s net asset value (NAV). ETFs have lower expenses than mutual funds. ETFs don’t try to beat their underlying index, they replicate the performance of the index. They try to be the market and not try to beat it. 1 The first ETF Standard and Poor’s depository receipts, S&P SPDR (Spiders) started trading in the USA in 1993. Globally ETFs were passively managed; however currently there are many ETFs that are actively managed. ETFs today manage $4 trillion globally and there are 2000 ETFs listed in the USA. The first ETF in India was launched by Benchmark AMC in 2001 in the form of Nifty BeES. Benchmark sold all its schemes to Goldman Sachs mutual fund in 2011, which in turn sold them to Reliance Nippon Life. Majority of the ETFs in India are passively managed, they track their underlying benchmark indices. The current size of the Indian ETF market is INR 74963 Cr as on November 2017. Benchmark ETF managed INR 70 Cr in 2004 in ETFs. Growth of actively managed equity funds has been faster, actively managed equity funds have grown from INR 29360 Cr in 2004 to INR 8.55 lakh Cr as on October 2017. Some of the types of ETF are: • Index ETF • Gold ETF • Bank ETF • Liquid ETF Index ETFs are the oldest and most common ETFs. Index ETFs invest in the same securities and in the same proportion of the index that they are tracking. Gold ETF gives investors exposure to gold without taking physical delivery of gold. The minimum ticket size to invest in physical gold is higher than if one were to invest in gold ETF, which can be bought in small denominations.