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Make way for Silver ETF

A Vinod Kumar, Founder, Perpetual Investments A Vinod Kumar, Founder, Perpetual Investments

Gold and silver are the two precious metals which are commodity favourites among the Indian households. People not only buy it for consumption but also for investment and gifting purposes. If one needs it only for investment, atleast for the yellow metal there are multiple routes- gold ETFs, sovereign gold bonds or gold mutual fund. But what about the silver metal? There is no single investment product that can give you easy access to silver investment.

Addressing this gap SEBI recently came out with details specifically for investments pertaining to Silver. This made way for product manufacturers to launch Silver ETF and other products which have Silver as its underlying asset. As a consequence, ICICI Prudential AMC launched India’s first exchange-traded fund that will give you investment access to silver.

Now let us understand why you should consider investing in commodity-based ETFs, especially in silver ETFs.

Why choose commodity-based ETFs

There are four reasons why one should consider investing in commodity-based ETFs. One of the major reasons is to create a hedge against inflation. Commodities are the best bet against inflation as their prices are highly linked to general price levels in the economy. Second, if you invest in the equity market, then commodities can diversify your portfolio due to their almost inverse correlation with equity markets. This means that when equity markets correct, commodity tends to do better and vice versa. Third, since commodities have actual real-world application, their values tend to be more stable, thus protecting your portfolio from volatility. Finally, precious commodities like gold and silver are seen as superior store of value.

Why invest in Silver

While gold has been providing commodity diversification for a long-time, silver too has a significant role to play in your portfolio. There are few compelling advantages of investing in it.

i) Industrial demand for silver has been increasing with the use of more renewable energy and mobility. It is widely used in specialist electronics, as it is an excellent conductor of electricity – better, even, than copper.

ii) Silver is relatively cheap in terms of valuation.

iii) Investing in silver is safe-haven investment during crisis. In the previous three crisis – global financial crisis, taper tantrum and covid-19 -- which affected global financial markets, silver had outperformed Nifty 50 TRI. For example, between 1st Jan 2008 and 27th Feb 2009, silver rallied over 13 per cent, while Nifty50 TRI fell by 54 per cent. Similarly, between 19th Feb 2020 and 23rd Mar 2021, it slipped by nearly 23 per cent while Nifty 50 TRI was down much more by 37 per cent.

iv) Diversifying portfolio with silver reduces risk. Data shows silver has outperformed Nifty 50 TRI seven times in the last 15 years as of December 2021.

Why invest through Silver ETFs

One can directly invest in silver futures, but the process is complicated for a retail investor. Talking about physical silver, it is not easy to sell it anytime you want. Apart from that silver is bulky in nature as well, making its storage a challenge. Holding the commodity in ETF provides eliminates the risk related to purity, safety of holding, insurance cost etc.

Economic outlook

The outlook for silver prices looks positive. This is because global silver demand has been consistently rising while the supply has not managed to keep pace. For example, it was estimated that for the first time since 2015, there is likely to be deficit of 7 million ounces in 2021. Going forward, this demand- supply mismatch is expected to run up the price of the commodity.

The ETF offerings will be benchmarked against the domestic price of silver as derived from the London Bullion Market Association (LBMA) prices. As a means to encourage wider participation among the mases, fund houses have launched silver offering with an investment ticket size as low as Rs. 100, during the new und offer period and even afterwards. Given that it is an ETF, an investor can buy and sell units at any point of the trading hour on stock exchanges. In case if you do not have a demat account, then you can opt for Silver Fund of Fund which has Silver ETF as its underlying. In effect, every investor in India has the opportunity to now diversify their commodity end of the portfolio with Silver.  

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