Silver, like Gold is considered to be an auspicious metal in India. Indian households buy silver jewellery on auspicious occasions like Deepawali, Dhanteras, Ugadi and New Year, etc. Silver is also a very popular gift especially for young children and for decorative purposes e.g. for figurines of deities. In developed markets, Silver is also an asset class from an investment standpoint. Though Gold exchange traded funds or Gold ETFs have been introduced in Indian market a long time back, Silver exchange traded fund or Silver ETF is still a recent phenomenon in our financial market. In this article we will discuss about Silver ETFs.
Why physical Silver is not suitable for investment purposes?
Traditionally, buying silver in India has been in physical form i.e. silver jewellery, silver bars or biscuits and silver coins. While you can purchase physical silver for jewellery or decorative purposes, it is not suitable for investment purposes. The reason being the impurities when you buy physical silver. Mostly silver jewelleries or coins will have impurities, the cost of which gets deducted from the price you get when selling the same. The other common problem with silver, particularly the silver jewellery is that it requires regular maintenance in terms of polishing and shining. Finally, there is s storage cost (bank locker rental) for keeping the Silver in safe custody. Actually, the storage costs of Silver can be higher than Gold, because Silver is a much more bulky commodity (for the same economic value) compared to Gold.
Why you should invest in Silver as an asset class
- Like Gold, Silver is also seen as a store of economic value and good investment over the long term horizon. Over a long period of time silver can retain its purchasing power, and is therefore, has traditionally been seen as one of the safest assets in India.
- Apart from its use in jewellery and coins, etc. silver is also used by Solar panel, Smartphone and Electric vehicle and other industries. As we witness the development of new age technologies, the demand of industrial use for silver is expected to rise substantially in future. However, the supply of silver is limited and thus the investment in it makes more sense. You should consider investing in silver as an asset class because potentially it can generate higher returns over long investment horizons.
- Silver, as an asset class, can be used in your asset allocation to diversify the risk in your portfolio because silver has low correlation with equities. Silver can make your portfolio more stable especially during times when equity valuations seem over-stretched.
- It is always prudent spreading your investments over different asset classes (known as asset allocation). Asset allocation diversify / reduce the portfolio risk. Both gold and silver can be used for your asset allocation. Gold and silver have low correlation with equities. It can bring stability to your portfolio in different investment cycles. Silver usually outperforms gold in bull-markets because demand of silver for industrial use grows in times of higher economic growth. Hence Silver can add further diversification to your investment portfolio.
How to invest in Silver as an asset class?
Silver ETF is a much more cost efficient way of investing in silver as there is no risk of impurities, no maintenance and no storage costs. They can be much more convenient, cost efficient and liquid investments compared to physical silver.
What are Silver ETFs?
Silver ETF is a financial instrument which tracks the price of pure silver. These instruments invest in physical silver or silver related instruments. Physical Silver of 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) conforming to London Bullion Market Association (LBMA) Good Delivery Standards are only permitted by SEBI for Silver ETF India funds. Further SEBI allows ETFs to invest in Exchange Traded Commodity Derivatives (ETCDs) with Silver as underlying asset. The exposure limits towards Silver ETCDs by the Silver ETFs may be capped at 10% of the Net Asset Value (NAV) taking into account the higher annualized rolling over expenses in Silver ETCDs (Depending upon the investment strategy) ou can see that investments in any Silver India ETF fund assures you of very high purity.
How to invest in Silver ETFs?
You need to have Demat and trading accounts to invest in Silver ETF Fund. You can buy or sell Silver ETFs at market prices on the stock exchanges through your stockbroker. Though Asset Management Companies (AMCs) do not provide SIP facility for ETFs, some stockbrokers provide SIP like facilities for investing in ETFs. Check with your stockbroker, if you want to invest systematically from your regular savings in Silver ETFs.
How can you buy Silver ETFs?
During the New Fund Offer (NFO) period of an ETF, you can subscribe to the ETF at par value. After the NFO closes, the ETF is listed on the stock exchange and trade like shares of listed companies. After the NFO period you can buy Silver ETF units on the stock exchanges through your Demat and trading account at prevailing market prices (ask / offer prices). You should note that while AMCs discloses NAVs of ETFs at the end of the day, the market prices during the trading hours may differ from the actual NAV.
However, the market (bid / ask) prices of actively traded or liquid Silver ETFs will not differ significantly from the NAVs. There is no minimum investment amount in Silver ETFs. You can buy one unit or more than one unit of Silver ETFs depending on your needs. Apart from buying Silver ETF units in the stock exchanges, you can purchase them directly from the AMCs at prevailing NAVs, if you are buying in lot sizes (also known as creation units). The lot size (creation unit) of an ETF is specified in the Scheme Information Document (SID).
How can you sell Silver ETFs?
You can sell Silver ETF units in the stock exchange at prevailing market (bid) prices through your Demat and trading account. As mentioned before, the market price may differ from the NAV. You can also redeem your ETF units with the stock exchange at prevailing NAVs, if you are transacting in lot sizes (creation units) as specified in the SID. You should know that the lot sizes of ETFs are quite large compared to average investment size of retail investors.
Taxation of Silver ETF
The minimum holding period for long term capital gains tax for Silver ETFs is 3 years. For investment periods of less than 3 years, profits from sale of Silver ETF will be added to your income and taxed as per your income tax rate. For investment periods of more than 3 years, long term capital gains tax applies. Long term capital gains in Silver ETFs are taxed at 20% after allowing for indexation benefits.
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