Silver ETF India: Should you Buy?

Gold and silver are more than just monetary investments for most Indians. They also serve as status symbols. However, the challenges of buying, holding, and selling have grown. In such a scenario, gold and silver Exchange-Traded Funds (ETFs) provide a convenient alternative to dealing with real gold and silver.  

Lately, silver is getting increasingly popular. The average cellphone includes 0.3 gm of silver, whereas an electric vehicle requires 25-30 gm of silver throughout production. 20 gm of silver is necessary for a typical solar panel. In addition to its use in electronics; brazing, jewellery and dinnerware are the other typical applications for metal. These alternate uses cause silver to be considered an industrial metal as opposed to gold, which is considered a precious metal.

Due to its improved utility, rarity and durability, silver prices are experiencing an uptick. As a result, it is being favoured by investors. As silver's popularity grows, several asset managers are introducing silver ETFs.  

What is Silver ETF? 

The pooled capital of ETFs can be invested in a wide range of securities (stocks, bonds, commodities, etc). The assets of silver ETFs are typically held in silver or silver-related assets. The principal holdings of a silver ETF are physical silver assets held in trust by the ETF's manager or custodian or exchange-traded commodity derivatives (ETCD). Silver ETFs are normally set up as grantor trusts, and each ETF share represents the right to a pre-determined amount of silver (in ounces). ​​​ 

The net asset value of silver ETFs is proportional to the price of silver. Silver ETFs mirror the market value of silver in real-time. The net asset value of these ETFs will shift in response to changes in silver's price. Silver is bought and stored safely by the silver ETF's fund management.  

The Indian government's Ministry of Finance operates the Securities and Exchange Board of India (SEBI), the country's primary securities and commodities market regulator. By policing ETFs, SEBI protects the interests of investors. Every so often, the fund managers should have audit reports on the silver in the vaults. 

Features of Silver ETFs

These are the distinguishing features of silver ETFs

1. Purity: Investors in silver ETFs should not be concerned about the authenticity of the metal. Fund managers only invest in silver that is at least 99.99% pure and keep it in locked vaults. 

2. Defend against rising prices in the economy: Gold and silver are two commodities that can act as a hedge against inflation. Thus, silver might be a safe investment choice in times of turmoil.

3. No storage fees: Those who invest in silver ETFs might save money on silver storage fees. The fund manager uses the investment capital to buy silver. A fund house is also responsible for keeping the assets safe and secure.

4. Reduced portfolio risk: Investing in precious metals like silver, gold, etc., which have a minimal degree of risk, is one way for individuals to spread their financial bets. As a result, their investment portfolio as a whole will be subject to less risk. 

SEBI Rules for Silver ETF

Before investing into a new option, it's essential to learn what the authorities governing it says about it. In this case, we will look at the essential data provided by Securities Exchance Board of india.

Important SEBI regulations and requirements for silver ETFs are as follows:

1. Restriction on Expenditure:

At least 95% of a fund's assets must be in silver and silver-related instruments.  Silver-related instruments might also include silver derivatives that are traded on an exchange. So managers can also use Exchange Traded Currency Derivatives (ETCD) to fulfil their obligations.

2.Error in Keeping Track:

The difference between a scheme's returns and those of a benchmark is known as the tracking error. The tracking error for investment firms is limited to a 2% margin. Fund houses are required to disclose the percentage of tracking inaccuracy on their website if it is greater than 2%.

3. Cost-Effectiveness Analysis:

Expense ratios for Silver ETF schemes are capped by SEBI at 1% of AUM. Fund companies charge investors this percentage to cover the cost of running the fund.

4. Purity:

Fund houses must purchase actual silver with a purity of 99.99%. This standard has been set by the London Bullion Market Association (LBMA). It helps maintain authenticity and eliminates the possibility of adulteration.

Taxes on Silver ETFs

Under the purview of Indian income tax laws, gold, silver and debt ETFs are treated similarly. As such, silver ETfs attract the following tax implications:

Silver ETFs held for up to 36 months or three years attract tax under the short term capital gains bracket. Therefore, they are added to an individuals annual income and are taxed according to their income slab. This applies even if the investor sells their units at a loss.

For ETFs held for more than 36 months or 3 years, long term capital gain laws apply. Thus income generated from sale of silver ETF units held for more than 36 months shall be taxed at a rate of 20%. Investors can avail of indexation benefits to reduce the tax burden attracted by LTCG on silver ETFs.

Silver ETFs as a Hedging Tool

When markets are volatile, investors often re-evaluate their portfolios to better prepare for the inevitable downturn. In times of uncertainty, investors are often drawn to the relative stability of precious metals like silver. 

Silver's significant demand across a wide range of industries—consumer electronics, vehicle manufacturing, solar energy, and housing, to mention a few—makes a case for including the metal in a diversified investment portfolio.

List of Best Silver ETFs in India

India's silver reserves are the third-largest in the world, just behind those of the United States and Germany. Also, it's one of the top 20 silver-producing nations. Because of this, major financial institutions in the country have begun offering silver ETFs as a new investment option. The purity of precious metals like gold, silver, diamonds, and platinum is what sets their prices.  

Five of India's largest mutual funds—ICICI Prudential AMC, Nippon India AMC, Aditya Birla Sun Life AMC, DSP Mutual Fund, and HDFC AMC—announced their intent to introduce silver ETFs last year. ICICI Prudential AMC introduced India's first silver ETF scheme in January 2021.  Silver ETFs have brought in over Rs 1,400 crore in assets for the funds this year through the end of July. 

Silver is also getting increasingly scarce. An Edelweiss analysis found that silver mining rose by 5% between 2019 and 2020. Silver's significant industrial demand has caused it to climb during bull markets at a considerably higher rate and greater distance than gold. Experts in finance argue that this is because it is frequently used as a strategic move. 

Silver ETFs have varying price points depending on the fund family they are associated with. 

Here are the names of silver ETFs in India: 

1. ICICI Prudential Silver ETF:

This ETF from ICICI Prudential AMC is suitable for investors looking to gain exposure to domestic silver prices can consider this ETF. The minimum investment amount is ₹100 and it is being managed by Mr. Gaurav Chikane. It has a zero exit load. 

Historically, the ETF has exhibited a low tracking error, meaning its returns closely mirrored domestic silver prices.

2. Nippon India Silver ETF:

Managed by Mr. Vikram Dhawan, this silver ETF provide a growth plan option to invest in. It has a very minute tracking error of 0.78% and has generated 5.35% returns ever since its inception.

3. Aditya Birla Sun Life AMC Silver ETF:

This silver ETF has 0 exit load and has generates a CAGR return of 8.70% till its inception. The minimum investment amount is 500 and it has over 97% allocation in commodities.

4. DSP Silver ETF:

With an expense ratio of 0.5%, DSP Silver ETF has nil exit load. It has generated over 14% CAGR return since inception and has a tracking error of 0.53%.

5. HDFC Silver ETF:

HDFC Silver ETF is being managed by Mr. Bhagyesh Kagalkar and has generated 18.4% return since inception. This ETF is for investors with a time horizon of 3 years and above.

SEBI greenlit silver ETFs on November 2021. The first silver ETF was introduced in February 2022. Thus, silver ETFs are a fairly new concept to the markets.

With the help of New Fund Offerings (NFOs), investors can now purchase silver as digital assets, which can then be traded during regular market hours.

Even though the NFOs for silver ETFs from DSP Mutual Fund and HDFC Mutual Fund have closed, investors can still subscribe to the Edelweiss Gold and Silver ETF FOF.

What You Need to Know Before Putting Your Money Down?

Investors seeking portfolio diversification will find silver ETFs to be an excellent choice. They are also a good choice for traders and investors who wish to gain exposure to silver without buying physical coins.

Silver ETFs are safe bets because their value is based on the metal's purity which is regulated. Because of this, they are appropriate for anyone wishing to diversify their portfolio with safe investments.

Silver ETFs lessen the hassle and expense of silver storage. Not only are they more convenient than actual silver, but they also save on taxes. Because of this, silver ETFs are a viable option for those who want to invest in silver only for the goal of earning a return and reducing taxes.

Investors who wish to track their funds live can invest in silver ETFs as they follow the market in real-time.

The Securities and Exchange Board of India states that "at least 95% of the net assets of a Silver ETF scheme must be invested in silver and silver-related products." Silver bars must be 30 kg in weight and 99.9% pure, as defined by the London Bullion Market Association. Additionally, the regulator has requested physical verification of the silver backing Silver ETF units from the fund houses.

The global economy and the stock market impact the value of all metals. On 24 August 2022, Edelweiss Mutual Fund introduced India to its first silver-gold ETF, which pools the anti-inflationary effects of gold with the practicality of silver. The plan puts money into both metals and will change their allocation based on market fluctuations.

The Bottom Line

5G connectivity, electric vehicles, and green energy all need silver. The potential for more metal use and interest has just been unlocked. Experts say silver is a long-term investment. Small investors would find it impossible to invest in silver without silver ETFs, given its high price. Silver ETFs don't have purity or storage issues. Silver ETFs in India may have more liquidity due to more buyers and sellers.

Despite this, silver ETFs are not a one-size-fits-all investment. It's important to consider the scheme's perks and downsides and investment quality.