Silver ETF

Silver ETFs are funds that track the price of silver and are traded on stock exchanges similar to stocks.

Silver exchange-traded funds (ETFs) have been standout performers in 2024, with gains of 19.7% so far this year. Over the last three months, they have surged nearly 21%, making them one of the top-performing asset classes in the market.

Silver ETFs are exchange traded funds that invest in physical silver of a high degree of purity. Therefore, by investing in a Silver Exchange Traded Fund, you can invest in silver without having to physically purchase, store, and protect the metal. In this article, we shall delve into the workings, features, taxability, and regulatory framework surrounding Silver ETF funds in India.

Beyond commodities like silver, diversified investments in mutual funds can help investors build long-term wealth while balancing risk. By combining asset classes like equity, debt, and commodities, investors can optimise their portfolio for stability and growth. Open Mutual Fund Account today and diversify your investments today.

What are Silver ETFs?

A Silver ETF is a financial product that tracks the price of pure silver. These instruments invest in physical silver or silver-related assets. SEBI allows Silver ETFs in India to invest only in physical silver, such as 30 kg bars with a fineness of 999 parts per thousand (99.9% purity), which must meet the London Bullion Market Association (LBMA) Good Delivery Standards. Additionally, SEBI permits ETFs to invest in Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying asset. However, the exposure to Silver ETCDs by Silver ETFs is capped at 10% of the Net Asset Value (NAV), considering the higher annualised rolling-over expenses in these derivatives (based on the investment strategy). Therefore, investing in any Silver ETF in India ensures exposure to silver of very high purity.

Additionally, SEBI has laid down several investment restrictions that must be followed by Silver ETFs. Let’s check them out:

• The silver or related securities that the silver ETF holds must be kept safe by a custodian. This custodian must be registered with SEBI.
• The funds in a silver ETF can only be used to invest in silver or silver-related instruments as per the specific objectives of the ETF.
• The mutual fund is allowed to invest a certain portion of its pooled funds in short-term deposits. However, these deposits must be with scheduled commercial banks.

How does Silver Exchange Traded Fund work?

The workings of Silver Exchange Traded Funds are fairly simple: the market prices of such funds are directly driven by the spot price of silver prevailing in the market. Whenever the spot price of silver fluctuates, the Net Asset Value of Silver ETFs also changes in response. Fund managers of Silver ETFs are required to purchase and safely store physical silver.

Should you wish to invest in a particular Silver ETF, you can purchase the required number of units from the exchange where it is listed and traded. By opting for Silver ETFs, not only do you get to invest in the precious metal and gain from appreciation in its market price, you do not have to invest in storage costs or insurance.

Features of Silver ETFs

In order to better understand Silver Exchange Traded Funds, let us discuss the salient features of such funds:

1. Purity: Whilst purchasing physical silver, you may have to worry about its purity and be dependent on the seller's credibility. There are, however, no such concerns with Silver ETFs since such funds invest in 99.99% pure silver.
2. Zero storage cost: Another striking feature of Silver ETFs is that you do not have to worry about the safekeeping or storage cost of physical silver. Such costs are borne by the fund managers while you get to enjoy a high degree of liquidity on your investment in silver.
3. Hedge against Inflation: Since the value of precious metals such as gold and silver is relatively less susceptible to market volatility, investments in Silver ETFs can help protect you against inflation.
4. Reduction in overall portfolio risk: By investing in Silver ETFs, you can add stability and balance to your investment portfolio and reduce your overall exposure to risk.

Types of silver ETFs

Investors must note that there are two primary types of silver ETFs: Physically-backed silver ETFs and futures-based Silver ETFs. Each type has its own way of giving investors exposure to the price of silver. Let’s understand both of them in detail:

1. Physically-backed silver ETFs

These ETFs are backed by actual physical silver bullion. This means these ETFs buy real silver and store it securely. When you buy shares of this ETF, you are essentially buying a portion of the physical silver that the ETF holds. The main aim of this ETF type is to closely match the spot price of silver, which is the current market price for immediate delivery of silver.

While Silver ETFs offer a way to invest in silver without the hassle of physical ownership, mutual funds provide a broader investment strategy with diversified exposure across various asset classes. Whether you're aiming for stability, growth, or risk management, the right mutual fund can help you build wealth effectively. INVEST NOW and create a portfolio tailored to your financial goals!

2. Futures-based silver ETFs

These ETFs are backed by silver futures contracts instead of physical silver. These futures contracts have an expiration date, meaning they are only valid for a certain period. As the contracts near their expiration, the ETF sells them and buys new ones to keep its exposure to silver prices. The primary goal of this type is to track the price of silver by using these futures contracts.

Why invest in Silver ETFs?

There are various advantages of investing in silver ETFs. Some of them can be mentioned as:

• Speed: It is easy for investors to enter and exit in the silver market as compared to physical silver.
• Purity: The silver that fund managers invest in is 99.99% pure, hallmarked silver which is stored in vaults. Hence investors don’t have to be concerned about the quality of the silver they have invested in.
• Hedge against inflation: Since silver is an industrial as well as a precious metal, it rarely devalues. Due to this, silver provides a hedge against inflation.
• Reduce risk: By investing in Silver ETFs you diversify your portfolio and reduce the risk
• No storage cost: When you purchase Silver ETF, there is no storage cost for the physical silver. It is borne by the fund manager.
• Liquidity: Silver ETFs are considered more liquid due to the constant demand for silver in industrial as well as commercial spaces. This makes them easy to liquidate.

Why you should invest in silver as an asset class

Silver, like gold, has long been recognized as a store of value and a prudent long-term investment. Its historical ability to maintain purchasing power makes it a cornerstone of diversified portfolios, particularly in regions like India.

Beyond its traditional use in jewellery and coinage, silver's industrial applications, such as in solar panels, smartphones, and electric vehicles, are poised to expand significantly with technological advancements. This growing demand, coupled with a limited supply, underscores silver's investment potential.

As an asset class, silver offers several advantages. Its low correlation with equities can help mitigate portfolio risk and provide stability during periods of market volatility. By incorporating silver into your asset allocation strategy, you can diversify your investments and potentially enhance long-term returns.

Silver's performance can be particularly compelling during economic expansions, when industrial demand is robust. This characteristic distinguishes it from gold and further strengthens its potential to contribute to diversified portfolio growth.

Taxation of Silver ETF

Silver is considered a capital asset and is classified as debt securities for tax purposes. When an individual invests in silver bullion and holds it for more than 36 months, the gains are subject to long-term capital gains tax, taxed at a flat rate of 20%.

If the investment is held for less than 36 months, the gains are classified as short-term capital gains and are taxed according to the individual's applicable income tax slab.

How are investments in silver exchange traded funds taxed?

While considering Silver Exchange Traded Funds as a potential addition to your investment portfolio, it is pivotal to understand their tax implications. The taxability of Silver ETFs is contingent upon your holding period of the instrument.

1. Short term holding: If you hold your investment in a Silver ETF for less than three years, any gains made from the sale of said investment shall be added to your income. Termed as a Short term Capital Gain, such a profit shall be taxed in line with the income tax slab applicable to you.
2. Long term holding: Should you hold your investment in a Silver ETF for a period exceeding three years and sell it afterwards, any gain thus made shall be considered a Long term Capital Gain and get taxed at 20%.

Silver ETFs as a means of diversification

Market instability often heightens investor focus on portfolio diversification as a means of mitigating risk. During volatile periods, precious metals such as silver often gain traction due to their perceived safe-haven qualities.

A compelling reason to consider including commodities like silver in a diversified portfolio is their broad industrial applications. Silver is widely used in various sectors, including consumer electronics, automotive manufacturing, solar energy, and medical devices, underscoring its enduring demand.

What should you consider before investing in a silver ETFs?

Now that we have discussed the taxability of Silver Exchange Traded Funds, let us turn our attention to the various key factors you must consider before investing in such a fund.

1. Compare expense ratios: Different Silver ETFs carry varying expense ratios; the higher this ratio, the lower your overall return on investment. Therefore, you must study the expense ratios of various available Silver ETFs before arriving at your investing decision.
2. Assess your risk appetite: Although investment in Silver ETFs is considered a low risk investment, the volatility in the prices of silver entails the presence of some degree of risk. You must take stock of your risk tolerance and accordingly make your investment decision.
3. Consider tracking error: Another key factor you must account for is tracking error, that is, the difference between the returns on an ETF and its benchmark index. Choosing a Silver ETF fund with a high tracking error is not advisable.

Who should invest in silver ETFs?

Silver ETFs are ideal for investors seeking to diversify their portfolios with precious metals. These ETFs suit those with a moderate to high-risk appetite, as the price of silver can fluctuate based on market demand and industrial usage. Investors aiming for short-term liquidity benefits or long-term appreciation can consider silver ETFs over physical silver due to the ease of trading and storage.

They are particularly beneficial for individuals looking for a hedge against inflation or market downturns since silver often retains its value during economic uncertainty. New investors seeking exposure to commodities in a simplified manner will also find silver ETFs appealing, as they eliminate complexities like storage and security concerns.

Professionals aiming for balanced exposure to industrial and precious metals in their portfolio should evaluate silver ETFs. However, understanding market trends and ensuring alignment with financial goals is essential before investing.

How to invest in Silver ETF in India?

Investing in silver ETFs in India is straightforward, especially for those familiar with stock market processes. Follow these steps:

1. Open a Demat Account: To invest in any ETF, including silver ETFs, you need a Demat account linked with a trading account.
2. Choose a Reputable Broker: Select a brokerage platform that offers silver ETFs for investment. Popular options include online platforms like Zerodha, Upstox, or traditional brokers.
3. Research Available Options: Compare different silver ETFs available in the market. Evaluate factors like expense ratio, liquidity, and tracking accuracy.
4. Place an Order: Once you've selected a silver ETF, log into your trading platform, search for the ETF by its ticker symbol, and place a buy order specifying the quantity.
5. Monitor Performance: After purchasing, keep track of your investment. Silver ETF prices fluctuate with silver's market price, so periodic review helps optimise returns.
6. Sell When Required: Selling is as simple as buying. Log in to your trading platform and place a sell order when you're ready to exit.

Silver ETFs provide an efficient way to invest in silver without the complexities of owning physical silver, making it accessible and convenient for Indian investors.

Pros of silver ETFs

There are several advantages that make silver ETFs an attractive option for investors looking to gain exposure to silver without the hassles of owning physical silver. Let’s have a look at some major ones:

• Cost efficiency
  Buying a silver ETF is usually cheaper than buying physical silver. When you buy physical silver, you have to pay for storage, insurance, and security. However, with a silver ETF, you avoid these extra costs ( although there might be some small fees related to the ETF itself)

• Liquidity
  Silver ETFs are easy to buy and sell because they are traded on stock exchanges. You can buy or sell shares at any time during the trading day at market prices. On the other hand, buying and selling physical silver can be more difficult and time-consuming.

• Flexibility
  Silver ETFs can be used for various investment strategies. You can buy them to bet on short-term changes in silver prices, protect yourself against inflation or currency fluctuations, or add silver to your diversified investment portfolio. This flexibility allows investors to use silver ETFs in different ways compared to owning physical silver.

• Dividend potential
  Some silver ETFs, especially those that invest in silver mining companies, usually pay dividends. These dividends come from the profits of the mining companies. Do note that not all silver ETFs pay dividends, but those that do can provide an additional source of income.

Cons of silver ETFs

Silver ETFs might prevent investors from the hassles of owning and maintaining physical silver, but they have several downsides that must be considered. Let’s study the major ones:

• Market volatility and price risk
  Silver prices can change quickly and unpredictably due to economic uncertainties, geopolitical events, and changes in industrial demand. This volatility affects the value of silver ETFs, which means you can lose money if silver prices drop.

• Tracking error
  Silver ETFs aim to mirror the performance of silver, but factors like management fees, operational expenses, and trading costs can cause the ETF's returns to differ from the actual performance of silver. Consequently, the ETF might not exactly match the price movements of silver.

• Counterparty risk with derivatives
  Some silver ETFs use financial instruments called derivatives to track silver prices. These derivatives rely on other entities (counterparties) to fulfil their obligations. If these entities fail, it can lead to losses for the ETF, as it doesn't own physical silver but contracts representing future ownership.

• Liquidity issues
  We mentioned liquidity as an advantage above, but it can also act as a disadvantage. Some silver ETFs may have low trading volumes. This less liquidity leads to wider bid-ask spreads, which makes it harder to buy or sell shares at the market price. Also, these higher spreads increase transaction costs for investors when buying or selling ETFs.

• Tax implications
  Investing in ETFs usually has tax implications, which largely depend on where you live and the type of investment vehicle you have opted for. When you sell silver ETF shares at a profit, you attract capital gains taxes. The tax rates at which you will be charged vary based on whether the gains are short-term or long-term.

SEBI guidelines for investing in Silver ETFs

One of the factors that make Silver ETFs a relatively safe investment option is the fact that they are highly regulated. Since such funds are traded on listed exchanges, the concerned fund houses have to actively and consistently ensure compliance with the regulations of the Securities and Exchange Board of India (SEBI). Here are the key SEBI regulations pertaining to silver exchange traded funds.

1. Purity of silver: Fund houses for Silver ETFs are required to purchase silver that is at least 99.99% pure. This is in accordance with the guidelines of the London Bullion Market Association.
2. Maximum permissible expense ratio: The expense ratio for a particular Silver ETF cannot exceed 1% of the total Assets Under Management (AUM) of said fund.
3. Minimum Investment in Silver: Silver ETFs’ fund houses are required to invest 95% or more of a particular fund's corpus in silver or silver-related investment instruments. In addition to physical silver, fund houses can also invest in Exchange Traded Commodity Derivatives.
4. Tracking error: The tracking error for any Silver ETF must not exceed 2%. Should this variance be greater than 2%, fund houses must mandatorily disclose the fact on their official portals.

Taxation of Silver ETFs

Silver ETFs in India are taxed as non-equity investments. If held for less than 36 months, short-term capital gains (STCG) are added to your income and taxed as per your applicable income tax slab. For investments held longer than 36 months, long-term capital gains (LTCG) tax applies at 20%, along with indexation benefits to adjust for inflation.

Additionally, dividends, if declared, are taxable at the investor’s income tax slab rate. It’s advisable to consult a tax advisor to understand the specific tax implications of silver ETF investments based on your financial profile.

Risks of investing in Silver ETFs

• Market demand: Silver is a fluctuating asset. Due to this, the demand and prices can be volatile.
• Control: Since you will be investing in a group of assets, you might give up on some control
• Taxation: When it comes to taxation, Silver ETFs are treated the same as conventional mutual funds.
• Tracking error: Silver ETFs keep track of the price of silver in open markets. This might cause the recording of outdated prices.

Examples of Silver ETFs

Numerous investment vehicles are available to track the performance of silver, both directly and indirectly. Among these are silver mining funds, which seek to capitalize on the gains and losses associated with silver exploration and mining activities. A notable example is the iShares MSCI Global Silver and Metals Miners ETF (SLVP). As per its prospectus, SLVP aims to replicate the performance of a global index comprised of companies primarily engaged in silver exploration and mining.

For investors seeking a more direct exposure to silver, the iShares Silver Trust (SLV) presents an alternative. Unlike traditional ETFs, SLV primarily holds physical silver, ensuring its value is directly tied to the price of the metal. Investors essentially purchase shares of this physical silver, subject to a 0.50% annual management fee.

Another option is the Global X Silver Miners ETF (SIL), which focuses on global silver mining companies. While SIL offers a more targeted approach, its liquidity may be comparatively lower than other popular silver ETFs, with an average daily trading volume of approximately 436,232 shares as of December 16, 2023.

Factors affecting Silver ETF share price India

Factor	Description
Silver prices	Silver ETFs track the spot price of silver. The price of the ETF typically rises or falls in line with the movement of silver prices.
Supply and demand	The price of silver is influenced by supply and demand factors. Increased industrial or investment demand for silver may drive up both its price and ETF value.
Currency fluctuations	As silver is traded globally, changes in currency values can affect silver and ETF prices. For instance, a stronger US dollar may lead to lower ETF prices for foreign investors.
Global economic conditions	Silver is considered a safe-haven asset during economic uncertainty. Factors like inflation or geopolitical events can increase demand for silver and impact ETF prices.
Other factors	Management fees, transaction costs, and taxes can also affect Silver ETF returns. It's important to consider these factors, along with macroeconomic conditions, when investing.

Silver ETF list based on expense ratio

Silver ETF	Expense Ratio
ICICI Prudential Silver ETF	0.30%
Nippon India Silver ETF	0.32%
HDFC Silver ETF	0.33%
Aditya Birla Sun Life Silver ETF	0.35%
Axis Silver ETF	0.36%

Lower expense ratios generally indicate more cost-effective investments, but investors should also evaluate liquidity and performance before choosing a silver ETF.

Top Silver ETF performance and returns

Schemes	1 Year Return	3 Year Return	5 Year Return
Nippon India Silver ETF	33.31%	13.60%	-
Axis Silver ETF	33.02%	-	-
HDFC Silver ETF	34.49%	-	-
ICICI Prudential Silver ETF	33.63%	13.49%	-
UTI Silver ETF	33.86%	-	-

Impact of government policies on Silver ETF in India

Government policies significantly impact silver ETFs in India. Import duty changes on silver directly affect the underlying asset’s price and, consequently, the ETF’s performance. Policies promoting manufacturing and industrial growth can boost silver demand, while economic reforms influencing commodity markets may alter silver’s market dynamics.

Additionally, regulatory policies by SEBI on ETFs ensure transparency and investor protection. Tax policies, such as GST on silver or changes in capital gains tax rates, also affect returns. Monitoring government announcements and policy changes is essential for investors to assess their potential impact on silver ETFs effectively.

Silver ETF GDP Contribution

Silver ETFs contribute to India’s GDP by mobilising investments into the silver market, indirectly supporting industrial growth and infrastructure development. As silver is a critical input for sectors like electronics, renewable energy, and jewellery, investments in silver ETFs enhance liquidity in these industries.

Increased trading volumes in silver ETFs also promote capital market development, boosting financial sector growth. By providing an efficient investment route for retail and institutional investors, silver ETFs channel savings into productive uses, thus aiding economic growth. The rising popularity of such ETFs reflects their growing role in contributing to India's overall economic progress.

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Silver ETFs vs Gold ETFs

Comparison of Gold ETFs and Silver ETFs:

Aspect of Comparison	Gold ETFs	Silver ETFs
Drivers of Demand and Prices	Acts as a portfolio diversifier and inflation hedge.	Used in jewellery and industrial applications. More correlated with economic cycles and equity markets.
Price Sensitivity	Less sensitive to economic cycles and equity market fluctuations.	More sensitive to economic conditions, potentially leading to higher volatility.
Storage Costs	Generally lower storage costs than silver ETFs.	Higher storage costs, contributing to a higher expense ratio.
Market Trading Volume	Traded in significant volumes.	May have lower trading volumes compared to gold ETFs.
Metal Pricing	Generally more stable due to its precious metal status.	More susceptible to price fluctuations based on economic conditions.

Comparing Silver ETFs and Silver Mutual Funds

Silver ETFs and Silver Mutual Funds offer investors an opportunity to invest in silver without physically holding the metal. While both options track silver prices, they differ in structure, liquidity, and costs. Understanding these differences can help investors choose the right option based on their financial goals and risk appetite.

Feature	Silver ETFs	Silver Mutual Funds
Investment Type	Directly invests in physical silver	Invests in silver ETFs or silver-related assets
Liquidity	Highly liquid, traded on stock exchanges	Less liquid, subject to fund redemption rules
Expense Ratio	Lower expense ratio	Slightly higher due to fund management costs
Minimum Investment	Requires a demat account	Can be invested in without a demat account
Volatility	Market-driven, fluctuates with silver prices	Moderated due to fund diversification

Key takeaways

• Silver ETFs offer investors a convenient and accessible way to invest in physical silver. These funds hold silver assets in trust and are designed to track the price of the metal.
• Given their potential to serve as a hedge against inflation, silver ETFs have gained popularity among investors seeking to diversify their portfolios.
• Compared to traditional physical silver holdings, ETFs provide greater liquidity, ease of trading, and are more accessible to individual investors.

Conclusion

Investments in Silver ETFs are an excellent alternative to investing in physical silver. Not only do such investments offer you a high degree of safety and liquidity, but they also enable you to benefit from the upward movements in the prices of silver.

You can also choose to invest in mutual funds to diversify your investment portfolio. With over 1000+ listed mutual funds on the Bajaj Finserv platform, you can surely find some options which meets your investment needs. You can easily compare various mutual fund schemes and use our SIP calculator to decide your monthly investment amount.

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