Your Questions Answered: I’m looking to invest in Silver ETFs — What could be the pros & cons?

Q. I run a small family business in Nagpur. Our family has been investing in gold and silver for the last 20 years. Recently, I learned that one can invest in gold and silver through exchange-traded funds (ETFs) too. We have decided to invest in silver ETFs. Can you please elaborate on the pros and cons of investing in silver ETFs, please list the top-performing silver ETFs too.

Vijay Oswal, Nagpur, Maharashtra

Introduction

The investment landscape in India has been witnessing a growing interest in commodities as an asset class, with silver ETFs emerging as a popular choice for diversifying investment portfolios. Silver ETFs offer investors the opportunity to gain exposure to the silver market without the complexities of handling physical silver. In this article we delve into the intricacies of silver ETFs in India, their working mechanism, benefits, taxation, and factors to consider before investing.

Silver ETFs are funds that track the price of silver and are traded on stock exchanges similar to stocks. They aim to mirror the performance of silver prices, providing a cost-effective and convenient way to invest in silver. In India, silver ETFs are required to maintain a purity of 99.9% for the silver they hold as per Securities and Exchange Board of India (“SEBI”) regulations.

The fund's Net Asset Value (“NAV”) fluctuates with the spot price of silver. Fund managers are responsible for purchasing and securely storing physical silver, and regular audits are conducted to ensure the integrity of the holdings. Under SEBI regulations, silver ETFs are mandated under law to invest 95% of their corpus in silver.

Performance and returns

The past year saw a remarkable surge in silver prices which were also reflected in silver ETF returns. We have listed below top 5 silver ETFs basis their past 1-year performance.

Note: Past performance is not an indication of future returns.

Pros and cons of silver ETFs

Investing in silver ETFs can be an attractive option for investors looking to gain exposure to silver. Here are some of the advantages of investing in silver ETFs:

Pros of investing in silver ETFs

Silver has long been considered a valuable commodity, serving as both as a form of currency and a material for various industrial applications. With the advent of silver ETFs investors have found a new avenue to gain exposure to this precious metal. Here, we list the advantages of investing in silver ETFs.

Cost efficiency: One of the primary benefits of silver ETFs is their cost efficiency. Investing in physical silver involves significant costs, including dealer markups, storage, insurance, and potential liquidity issues. Silver ETFs, on the other hand, offer a more cost-effective way to invest in silver, as they typically have lower expense ratios and eliminate the need for physical storage.

Liquidity: Silver ETFs are highly liquid investment vehicles. They can be bought and sold like stocks on major exchanges, providing investors with the flexibility to enter and exit positions quickly. This liquidity is a significant advantage over physical silver, which can be cumbersome to sell and may involve a lengthy process.

Hedge against inflation and market volatility: Silver has historically been seen as a hedge against inflation and market volatility. As an asset class, it often has a low correlation with traditional investments like stocks and bonds, meaning it doesn't necessarily move in tandem with these assets. This characteristic can help investors protect their portfolios during times of economic uncertainty.

Accessibility: Silver ETFs provide a level of accessibility that is not available with physical silver. Investors can add silver to their portfolios with the same ease as trading stocks, directly from any brokerage account. This convenience has made silver ETFs a popular choice for both novice and experienced investors alike.

Transparency and authenticity: Silver ETFs offer transparency and authenticity in their underlying assets. This level of transparency is difficult to achieve with physical silver, where the quality and quantity of silver may be uncertain.

In conclusion, silver ETFs present a compelling investment opportunity for those looking to gain exposure to silver. They offer cost efficiency, liquidity, flexibility, diversification, and potential tax advantages, making them an attractive option for a wide range of investors. As with any investment, it's important to conduct thorough research and consider your financial goals and risk tolerance before investing in silver ETFs.

Cons of investing in silver ETFs

Investing in silver ETFs is generally perceived as a sound investment that provides diversification and also serves as a hedge against inflation. However, as with any investment, there are certain cons that investors should first consider before investing their capital.

Market risk: One of the primary concerns with investing in silver ETFs is market risk. The value of these funds is closely tied to the fluctuations in the price of silver, which can be highly volatile. Factors such as economic uncertainty, currency fluctuations, and changes in industrial demand can all affect silver prices, and consequently, the performance of silver ETFs.

Expenses: Silver ETFs charge management fees and operational expenses which form part of the expense ratio, which can eat into your returns.

Tracking errors: Silver ETFs may not track the price of silver perfectly. The difference between the returns of the scheme and that of the benchmark is known as a tracking error.

Who should invest in silver ETFs

Silver ETFs can be an attractive option for various types of investors:

Diversification seekers: For those looking to diversify their investment portfolio beyond traditional stocks and bonds, silver ETFs can offer a low correlation to these assets, potentially reducing overall portfolio risk.

Inflation hedges: Investors concerned about inflation may find solace in silver ETFs. Historically, precious metals have served as a hedge against the eroding value of fiat currencies.

Growth investors: With the increasing demand for silver in industrial applications, especially in areas like solar energy and electronics, growth-oriented investors might see silver ETFs as a way to tap into this expanding market.

Factors to consider before investing in silver ETFs

Before investing in a silver ETF, it's crucial to consider several factors:

Market conditions: The price of silver can be influenced by a variety of factors, including industrial demand, currency fluctuations, and global economic conditions.

Expense ratios: Silver ETFs come with management fees that can impact overall returns. It's important to compare the expense ratios of different ETFs.

Investment goals: Aligning the choice to invest in a silver ETF with one's investment strategy and goals is essential. Whether it's for long-term growth, short-term gains, or portfolio diversification, the investment should match the investor's objectives.

Conclusion

Silver ETFs in India represent a viable option for those looking to invest in precious metals without the direct ownership of physical silver. With their ease of investment, purity assurance, and liquidity, silver ETFs can play a strategic role in portfolio diversification. However, investors must conduct thorough research and consider their risk tolerance, the ETF's expense ratio, and tracking errors before making investment decisions.

Kuvera is a free direct mutual fund investing platform. Unless otherwise stated data sourced from BSE, NSE and kuvera.