Silver ETF And Its Role In Your Portfolio

Investors in India now have a choice of two types of precious metals for their commodity exposure.

While gold has been available in the form of Exchange Traded Funds since a long period of time, it is only in the last year that silver has become accessible through the ETF route.

This makes it an additional choice that investors can look at when they are considering an exposure to commodities in their portfolio.

Silver ETFs are funds that track the price of silver and these are also listed on the stock exchanges. So, an investor is able to get multiple prices for entry and exit during the day as the ETF is traded on the markets.

This is different from a single net asset value at the end of the day that is seen in a normal mutual fund. Investors trade the ETF among themselves, so liquidity is a key factor that needs to be tracked in the specific ETF.

The change in the price of silver determines the price movement in the value of the fund.

A key difference between gold and silver is that silver has a dual use. One of them is its role as a precious metal where it is used for jewellery as well as investment.

At the same time, there is also an industrial use for it. Many industries use silver including industrial equipment, energy production, telecom, as well as emerging areas like electric vehicles. This makes the demand for silver dependent on both consumption by individuals plus industrial demand.

Silver prices normally show movements depending on the demand for the metal as well as the economic conditions present in the world economy.

In the last couple of years, the price of silver has seen weakness in the international market with the end result that the one-year and the two-year return on silver is negative, as on Aug. 26, 2022.

There is a hedge against currency depreciation in the silver prices in India, so this is an additional factor to consider.

However, over the longer term, there has been a rise in the value of the precious metal and this has led to positive returns coming in for the investors.

There are two ways to take an exposure to silver in India through the mutual fund route.

One is to invest in an ETF where the investment has to be done through the stock exchange using the demat account. The other is to buy a fund of funds that buys the silver ETF.

Buying the silver ETF directly is the better option as this would be more cost-efficient, which would be visible in the returns.

Already six fund houses—Aditya Birla Sun Life MF, DSP MF, HDFC MF, ICICI Prudential MF, Nippon India MF and Axis MF—have launched their silver ETF in the market that investors can choose from.

All the silver ETFs track the price of silver, so the tracking error would be the main factor impacting the returns from different funds.

The investor can look at the fund house that they are comfortable with and then make the investment since the returns are in a narrow range.

It does not matter whether the investor buys the units through a new fund offering or from an existing fund, as what is important is the prevailing silver price when the purchase is made.

The taxation of silver ETFs is similar to that of debt funds. This means that the capital gains would be long-term in nature only when the units are held for a period of three years or more.

In case of a short-term capital gain, when the units are held for less than three years, the gains would be added to the income of the individual and taxed at the applicable tax slab the individual falls under.

In case of long-term capital gain, the rate of taxation is 20% with the benefit of indexation.

Investors looking for an exposure to silver to diversify their portfolio should consider this as an option.

This would be a different investment as compared to gold within both the precious metals as well as the commodities space.

The overall exposure to precious metals should not be more than 10% of the portfolio.

In addition, the current pullback in the price of silver as well as the expected future prospects, considering the increasing use of the metal in the clean energy sector, makes it an attractive option.

(Arnav Pandya is founder of Moneyeduschool.)