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Investing in precious metals like gold and silver has always been a preferred choice for Indians. Now, with the introduction of Silver ETFs, you have a modern and convenient way to add silver to your portfolio. In this blog, we’ll explore everything you need to know about Silver ETFs-how they work, their benefits, and whether they are the right investment for you. So Let’s get started.
What are Silver ETFs?
Silver ETFs, or Silver Exchange Traded Funds, are a simple and efficient way to invest in silver without the hassle of storing physical metal. These funds track the price of silver and are traded on stock exchanges just like stocks. When you buy units of a silver ETF, you are essentially investing in silver without physically owning it.
One of the biggest advantages of silver ETFs is liquidity. Unlike physical silver, which can be difficult to sell quickly, silver ETFs can be bought and sold on stock exchange at market prices. This makes them a convenient option for investors looking for flexibility.
Silver ETFs hold physical silver, and each unit of the ETF represents a specific quantity of silver. As silver prices fluctuate, the value of your ETF investment moves accordingly.
Suppose the current market price of silver is ₹80 per gram. You buy 100 units of a silver ETF, where each unit represents 1 gram of silver. If the silver price rises to ₹90 per gram, your ETF investment value increases to ₹9,000 from ₹8,000, giving you a ₹1000 gain.
Now you understand Silver ETFs meaning, let’s explore the different types of Silver ETFs available in the market.
Types of silver ETFs
When investing in Silver ETFs funds, you’ll come across two main types:
1. Physically backed Silver ETFs
These ETFs hold real silver, stored in secured vaults. When you invest in these ETFs, you’re essentially buying a share of that silver. The fund’s value moves closely with the price of silver in the market. This type of ETF is ideal if you want a direct investment in the metal itself.
2. Futures based Silver ETFs
Instead of holding physical silver, futures based silver ETFs invest in silver futures contracts. They buy and sell these contracts to track silver prices. However their performance may not always match silver’s market price exactly due to factors like contract rollovers and market conditions.
Features of Silver ETFs
Silver ETFs come with several unique features that make them an attractive investment option:
- Purity: Most Silver ETFs in India invest in silver with 99.9% purity. This ensures that your investment is backed by high quality silver, maintaining its value over time.
- Acts as a Hedge against Inflation: Like gold, silver is considered a safe-haven asset. When inflation rises and the value of currency drops, silver prices often move up. This can help protect your purchasing power over the long term.
- No Storage Costs: With Silver ETFs, you don’t have to worry about securing or storing physical silver. The fund takes care of this, saving you extra costs and effort that come with holding physical silver.
- Portfolio Diversification: Adding silver to your investment portfolio can help you reduce overall risk. Silver often performs differently from stocks and bonds, means it can act as a stabilizer when markets are volatile.
- Liquidity & Transparency: Silver ETFs are listed on stock exchanges, allowing you to buy and sell them easily during market hours. Plus, you get full transparency on pricing, as ETFs closely track the market value of silver.
- Lower Investment Amounts: Unlike physical silver where you may need to buy in bulk, Silver ETFs allow you to start investing with a much smaller amount. It makes them more accessible to a wide range of investors.
Examples of Silver ETFs
In India, you have several options when it comes to silver ETF funds. Some popular ones include:
- ICICI Silver ETF
- Nippon India Silver ETF
- ICICI Prudential Silver ETF
- Tata Silver ETF
- Aditya Birla Sun Life Silver ETF
- HDFC Silver ETF
Each of the above mentioned funds aims to track the price of silver, but they might have different expense ratios and tracking errors. It’s always important to compare these factors before choosing a fund to invest in.
How Does a Silver ETF Work?
Workings of a silver ETF are quite simple . Here’s a simple breakdown:
Silver ETF lets you invest in silver without physically owning it. These funds either hold physical silver in secured vaults. Their value fluctuates based on silver prices in the market.
Trading Silver ETFs is simple:
- Fund houses create ETF shares backed by silver.
- You buy these shares on the stock exchange through your broker.
- Their price moves in line with silver’s market value.
- You can sell them anytime during market hours.
Silver ETFs offer liquidity, easy access and a hassle free way to invest in silver without worrying about storage or security.
Pros of Silver ETFs
Investing in silver ETFs comes with several advantages:
- Cost Efficiency
Investing in silver ETFs eliminates the costs of storing and securing physical silver, making it a more affordable option. Management fees and transaction costs are generally lower compared to physical silver investments.
For example, Storing 5kg of physical silver securely could cost approx ₹5,000 annually, whereas investing in a Silver ETF typically comes with an expense ratio of around 0.5% of your investment amount.
- Liquidity
Silver ETFs can be easily bought and sold on stock exchanges, providing high liquidity. This feature is particularly advantageous for investors who require the flexibility to enter or exit positions quickly. If you need to convert ₹60,000 worth of silver into cash quickly, selling a Silver ETF takes just minutes, whereas selling physical silver can be a much longer process.
- Flexibility
Investors can trade silver ETFs during market hours, just like stocks, offering greater control over their investments. This flexibility allows investors to react promptly to market movements. For Example you can start investing in a Silver ETF with as little as ₹500, while buying physical silver, like a small coin, may require ₹3,000 or more.
- Dividend Potential
Some silver ETFs may offer dividends, providing an additional income stream for investors. While not common, dividend paying silver ETFs can enhance overall returns.
- Diversification
Silver ETFs enable investors to diversify their portfolios by adding exposure to precious metals. This diversification can help mitigate risks associated with other asset classes such as equities or fixed income.
Cons of silver ETFs
Like any investment, silver ETFs also come with some drawbacks:
- Market volatility and price risk
Silver prices tend to be highly volatile. For instance in 2020, Silver ETF fluctuated between approx ₹40,000 and ₹72,000 per kg. Such price fluctuations can result in short term losses if you need to sell during a market dip.
- Tracking error
The performance of a silver ETF may not perfectly match the price movements of silver due to tracking errors. These discrepancies can arise from fund management practices or market inefficiencies. A tracking error of just 0.4% on an investment of ₹1,00,000 could result in a ₹400 difference in returns over a year.
- Counterparty risk with derivatives
Futures-based silver ETFs carry counterparty risks, as they rely on the performance of contracts rather than physical silver. If the counterparty defaults, it could impact the ETF’s returns. Though rare, an event like this can impact the fund’s performance.
- Liquidity issues
In certain market conditions, trading silver ETFs may become less liquid, making it difficult for investors to enter or exit positions. Illiquidity can result in higher bid-ask spreads, increasing transaction costs. A spread that is usually ₹0.08 can widen to ₹0.45 or more during periods of market volatility.
- Tax implications
If you sell Silver ETF units within 12 months, the gains are classified as short term and taxed at 20%. For holdings exceeding 12 months, the tax rate is 12.5%, similar to equity shares. Additionally, profits up to ₹1.25 lakh are exempt, and only the amount beyond this limit is taxable.
Things to Consider Before Investing in Silver ETFs
Before you jump into silver ETF investing consider these factors:
- Risk Appetite
Investors should assess their risk tolerance as silver ETFs can experience significant price volatility. Understanding one’s financial goals and investment horizon is important before investing. If a 20-30% swing in your investment value makes you uncomfortable, silver ETFs might not be for you.
- Expense Ratio
Expense ratio of a silver ETF can impact returns. It is essential to compare different ETFs to find cost effective options. Lower expense ratios are preferable for maximizing net returns .Look for ETFs with lower expense ratios. Difference of 0.2% in expense ratio could mean ₹200 less return per year on a ₹1,00,000 investment.
- Tracking Error
Choose ETFs with minimal tracking error to ensure closer alignment with silver’s market price. Reviewing the fund’s historical performance and tracking record can provide insights.
How to invest in Silver ETF in India?
Investing in silver ETFs in India involves the following steps:
- Open Demat and trading account with a broker.
- Research and compare available silver ETFs.
- Place a buy order through the broker’s trading platform.
- Monitor the investment regularly to track its performance.
- Monitor silver’s price trends and macroeconomic factors that may impact its value.
SEBI Rules for Silver ETF
Securities and Exchange Board of India or SEBI has outlined specific rules for silver ETFs to ensure transparency and investor protection.
Investment Ceiling
Silver ETFs must primarily invest in silver or silver related instruments ensuring at least 95% of their assets are allocated to these investments.
Tracking Error
SEBI requires Silver ETFs to keep tracking error below 2% to ensure their performance closely follows silver prices. This regulation boosts investor confidence by maintaining price accuracy.
Expense Ratio
SEBI limits the expense ratio for Silver ETFs to 1% of AUM, ensuring controlled management fees and better returns.
Purity
SEBI mandates that Silver ETFs in India can only invest in physical silver, specifically 30 kg bars with 99.9% purity, meeting LBMA Good Delivery Standards..
Factors Affecting Silver ETF Share Price India
The price of silver ETFs in India can be influenced by several factors:
- Global Demand and Supply: Changes in silver’s global demand particularly from industries like electronics and solar energy, can impact prices.
- Currency Fluctuations: As silver is traded internationally in US dollars, changes in INR-USD exchange rates can affect prices in India.
- Economic Conditions: Silver prices often rise during economic uncertainty, influencing ETF prices.
- Inflation Rates: Higher inflation rates may drive up the demand for silver as a hedge.
- Geopolitical Events: Events like trade wars or sanctions can affect silver’s price due to its safe haven status.
Final Words
Silver ETFs provide a convenient and cost effective way to invest in silver, offering benefits such as liquidity, flexibility and portfolio diversification. However, investors should be mindful of risks like price volatility, tracking error and tax implications. Conduct thorough research and consult a financial consultant to determine if silver ETFs align with your investment goals.
Frequently Asked Questions
Is silver a risky asset?
Silver is a moderately risky asset with high price volatility influenced by industrial demand, economic trends, and investor sentiment. For example, it surged 24% in April 2011 before sharply declining.
Is it better to buy physical silver or an ETF?
Choosing between physical silver and Silver ETFs depends on your goals. Silver ETFs offer easy trading, no storage hassle, and small investment options, while physical silver ensures direct ownership but requires secure storage.
Do Silver ETF pay dividends?
Silver ETFs typically don’t pay dividends. Returns mainly come from price appreciation, though some may distribute income from silver lending or interest on cash holdings.
Is a silver ETF a good investment?
Silver ETFs help diversify portfolios, offer growth potential, and hedge against inflation. However, they carry risks like price volatility and ongoing costs.
Can I buy silver ETFs in India?
Yes, you can invest in Silver ETFs in India through a demat and trading account.
Who should invest in silver ETFs?
Silver ETFs can be suitable for various types of investors. They might also appeal to anyone looking to diversify their investments beyond traditional stocks and bonds. Silver ETFs may be suitable for investors seeking to hedge against inflation or currency fluctuations.
Why invest in Silver ETFs?
Silver ETFs offer exposure to silver prices without storage hassles. They are easily tradable, diversify portfolios, hedge against inflation, and allow smaller investments than physical silver.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
