Recently, investors have shown great interest in silver ETFs. By investing in this product, investors can own positions in silver without owning silver bars or coins. Silver-backed exchange-traded funds are expected to simulate the daily fluctuations in the price of silver. Therefore, you can handle silver investment like trading in stocks. The introduction of silver ETFs has made silver investing easier, cheaper, and safer for investors.
With silver ETFs, you do not have to manage the storage of silver or test to see if it is pure. Some investors use silver as an attractive means of investing in hard times. That is why investors typically prefer the silver ETFs. They make it easy for you to introduce precious metals to your investment portfolio, whether you are a novice or an expert.
How does a silver ETF work?
Silver ETF is a passive fund that tracks the price of real silver in the Indian market. The silver ETF is designed to provide returns equivalent to silver’s market movement, but there can be minor tracking errors. Since the ETF is a basket of silver, its value will increase or decrease depending on the daily price. Anyone can buy or sell ETFs after they are listed on the stock exchange, just like shares.
This makes investing in silver easy and uncomplicated. You do not need to worry about keeping silver or verifying its purity. In India, the physical investment volume for silver reached 49.3 million troy ounces in 2023. It has immense potential. Besides, you can invest or exit your silver ETF investment any time.
Features of silver ETFs
Silver Exchange-Traded Funds (ETFs) are a smart way of investing in silver without holding it physically. Such funds follow the price of silver and are only traded in stock exchanges like shares. Silver ETFs provide investors a convenient and low-cost way to get exposure to silver. Let’s review some of the features that make them popular.
1. Purity
Guaranteed purity is one of the major benefits of silver ETFs. The money from these funds is invested in 99.9% pure silver. But investors need not be concerned about quality because the silver in the ETF product is subject to frequent audits and kept in high-security vaults. This means you get real value for your money.
2. Acts as a hedge against inflation
Silver, too, is a safe-haven asset, like gold. In periods of inflation or economic turbulence, silver does not lose value. Investing in a silver ETF protects your capital from depreciating money. It can be a buffer in your investment portfolio in a volatile market.
3. No storage costs
Purchasing physical silver means paying for storage and protection. Silver ETFs remove this hassle. You don’t have to worry about lockers, insurance, and theft. Because everything is done electronically, investing is much easier and cheaper.
4. Reduced portfolio risk
Diversifying your portfolio is important. A silver ETF can diversify your portfolio and lower risk on average. Because silver tends to be a different kind of asset from stocks or bonds, it balances your portfolio. In this way, if one asset class underperforms, another asset class will make up for that.
Taxation of silver ETFs
Understanding the tax rules of Silver ETFs is crucial if you want to maximize your investment returns. If you sell your Silver ETF units in the first 12 months, the profit is known as Short-Term Capital Gains (STCG), and it is subject to a tax rate of 20%. However, if you keep them beyond 12 months, it’s considered Long-Term Capital Gains (LTCG).
According to new rules, LTCG on silver ETFs is levied at 12.5% like equity shares. The best gains up to the limits of ₹1.25 lakhs in a financial year are tax-free. Profits higher than this limit are only taxed.
Also, with a silver ETF, the dividends you receive are not tax-free. These are logged to your gross income and subject to tax according to your tax slab. These straightforward tax rules, once known, can help you plan better and benefit most from your silver ETF investment.
Things to consider before investing in silver ETFs
You can safely invest in silver ETFs. However, one should consider the following before investing in this financial product.
1. Risk appetite
Silver, like gold, is a precious metal, and its price may vary greatly. If you are one of those investors who get nervous by fluctuations in the market, be very careful when you invest in silver ETFs. Silver prices may be affected by global demand, commercial use, or even geopolitical events. Ensure your investment adds up to your risk tolerance and your financial objectives.
2. Expense ratio
Every ETF investment has a cost attached to it, called the expense ratio. This is the fee paid to the fund manager to administer the fund. While silver ETFs typically come at a cheaper price than mutual funds, the expense ratio can still impact how your returns look years later. So, always compare silver ETFs and expense ratios before selecting one.
3. Tracking error
Tracking error is the variation of the performance of the silver ETF from the actual price action of silver. A lower tracking error indicates that the ETF tracks the silver price, which is good. Very high tracking errors may diminish your gains, so you should better opt for ETFs with a history of good tracking of the prices of silver. In other words, know your level of risk-taking, weigh the costs, and look at how well the ETF tracks the price of silver. These simple tests will help you invest more confidently.
SEBI rules for silver ETFs
Silver Exchange-traded Funds (ETFs) allow investors to invest in silver without owning the metal. To help protect investors and to ensure transparency, the Securities and Exchange Board of India (SEBI) has set stern guidelines for fund houses that deal in silver ETFs. Some essential SEBI regulations you need to know are listed below.
1. Investment Ceiling
SEBI mandates that silver ETFs invest at least 95% of their total assets in silver and silver-related instruments. Such instruments may comprise physical silver and exchange-traded commodity derivatives (ETCDs), which involve silver. This rule ensures that most of the fund is directly linked to the price of silver, ensuring that the investor gets accurate exposure to the price of silver.
2. Tracking Error
Tracking error is the deviation in returns generated from an ETF versus those of its benchmark. SEBI has capped this tracking error at 2%. If the error falls within this limit, it should be disclosed openly on their website or official site by the fund house.
3. Expense Ratio
The expense ratio is the fees the fund houses charge their investors for managing the ETF. SEBI has capped the hedge at 1% of the AUM of the ETF. This leaves the cost of investing relatively low and within the reach of retail investors.
4. Purity
SEBI further mandates that fund houses buy physical silver of 99.99% purity to meet the guidelines of the London Bullion Market Association (LBMA). This rule exists to give confidence to the quality of silver in the hands of the fund, thus preventing fraud or adulteration.
Conclusion
Everyone finds it easy to invest in silver, thanks to silver ETFs. Now, you don’t have to buy or store physical silver. These products offer a safe and cheaper way of diversifying your portfolio by including silver. With increasing interest in precious metals, silver ETFs are trending. But don’t forget to read the product details before making your investment.
FAQs
Which silver ETF is best?
The best-known silver ETF in India is the ICICI Prudential Silver ETF. It follows silver prices and holds physical silver. It is a reliable choice, having good liquidity and low tracking error. Always compare the expense ratios of different silver ETF products before investing.
How can I buy silver ETFs in India?
If you want to purchase silver ETFs, you can do so through any stockbroker or online trading site. Just open a demat account, look for the silver ETF, and place your order. It’s simple, like buying shares.
Which ETF holds physical silver?
In India, silver ETFs such as ICICI Prudential Silver ETF and Nippon India Silver ETF keep physical silver in vaults. They keep it safe and align it to market prices; thus, your investment tracks the performance of real silver.
