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Should you invest in silver funds?

Several asset management companies have launched silver funds

silver-shutterstock Representative image | Shutterstock

Do you want to invest in silver, but without worrying about storage hassles? Well, now you have a choice in the form of exchange-traded funds or fund of funds that invest in the underlying ETFs. 

In recent days, several asset management companies like Nippon India MF, ICICI Prudential AMC and Aditya Birla Sun Life AMC have launched new fund offers for such schemes. Several other fund houses plan to launch silver funds in the market. 

Back in November 2021, the Securities and Exchange Board of India announced operating norms for silver exchange-traded funds. Until then, AMCs were only allowed to launch gold ETFs. The green light from the market regulator has led to a rush among mutual fund houses to apply for and launch such schemes in the market.

As per SEBI norms, ETFs tracking silver will have to invest at least 95 per cent of their net assets in silver and silver-related instruments. 

“Traditionally, in India, investors have been investing into physical silver but the challenge is that silver is bulky in nature. Hence, storage becomes a point of the challenge. By way of investing through silver ETF, investors need not worry about storage, purity etc., thus enabling investors to invest in silver in a very efficient manner,”  Chintan Haria, head of product development and strategy at ICICI Prudential AMC told THE WEEK.

The product had been on the wishlist of the industry for a very long time and hence so many fund houses are desirous of offering these funds now that SEBI has notified rules for the same, said Abhishek Singhal, head – passives and alternative strategy at Aditya Birla Sun Life AMC. 

Traditionally it has been gold that has been considered as a safe haven asset and a hedge against inflation. However, silver has more use cases, beyond just jewellery or coins or artefacts. 

“Silver is one of the most widely used precious metals today and is a key ingredient of many key industries. It has come a long way from being used for only jewellery, currency and limited uses like photography. As a key element of batteries, electric vehicles, solar panels, pharma products and telecom products, demand for silver is growing at a pace unparalleled by its supply and hence has multiple reasons for price appreciation,” Singhal told THE WEEK.

The addition of silver to a portfolio will bring in diversification, pointed Haria. 

“The metal tends to act as a hedge against inflation as their prices are highly linked to general price levels in the economy. Since silver has a limited correlation to other asset classes, investors across the risk spectrum can consider investing in silver. In addition, silver as a precious commodity has been delivered during times of crisis,” said Haria.

He noted that silver had outperformed during the 2008 subprime mortgage crisis, then the taper tantrum and even during the COVID-19 pandemic. In the past three years, silver had delivered an absolute return of 74 per cent, he said. However, over a longer period (last decade), it has underperformed equity. 

Asset managers point out that demand for silver has been rising by 15 per cent per year, but supply is failing to keep up the pace, growing at just 8 per cent. The expected rise in silver demand given the huge shift towards electric mobility forecast globally over the next decade should augur well for the commodity and could drive prices higher, they add.

“We feel that with increased alignment to the industry due to its burgeoning demand in a variety of sectors like 5G, EVs, solar energy etc., silver has the potential to outperform other asset classes too over the medium term,” said Singhal of ABSL AMC.

He feels people should invest in silver ETFs or silver funds from a long-term perspective.

Silver ETFs will work just like Gold ETFs, where units are backed by physical silver. The performance of the funds will be benchmarked against the domestic price of silver as derived from the LBMA (London Bullion Market Association). Physical silver will also be of 99.9 per cent purity. This means investors won’t have to worry about issues like purity levels and how to store the silver. 

Also as Hemen Bhatia, head ETF at Nippon India MF pointed out, through ETFs or the fund of fund route, investors can invest in small denominations and there is also the advantage of easy liquidity. 

Do note that silver ETFs require investors to have a Demat account. Alternatively, you could invest in a silver fund of funds, which will essentially invest in and track the underlying ETF of the same AMC. 

Before you rush to invest, here is what a personal finance expert has to say.

Investors who have been investing in commodities and those who were looking for opportunities to invest in silver may consider these ETFs, said Harshad Chetanwala, co-founder of MyWealthGrowth.com.

However, he also has a word of caution.

“Silver historically has been volatile and hence investors should consider this volatility in mind before investing in it,” he told THE WEEK.

Over a period, silver has also been more volatile than gold, and therefore people should not hurry to invest in the silver ETFs, he felt.

“As far as asset allocation goes, one can consider gold as a more stable and acceptable investment avenue compared to silver,” said Chetanwala. 

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