ICICI Prudential Mutual Fund Silver ETF NFO review: Should you invest?

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© Sandeep Sinha ICICI Prudential Mutual Fund Silver ETF NFO review: Should you invest?

ICICI Prudential’s silver exchange traded fund (ETF) opens for subscription from today (January 5, 2022).

Several mutual funds have lined up their silver ETFs after the market regulator Securities and Exchange Board of India (SEBI) allowed the product, subject to certain regulations.

What is the scheme about?

The silver ETF will track the investment returns of its underlying silver holdings. SEBI rules require silver ETF to hold silver having 99.9 percent purity.

Mutual funds are required to value silver in accordance with the London Bullion Market Association (LBMA) standards.

The ETF will have an expense ratio of 50-60 basis points. As it is an ETF, only investors with demat account will be able to invest. Investors will have to bear brokerage fees or any other costs of transacting on the exchanges. ICICI MF will be launching a Silver ETF Fund of Fund on January 13, 2022 so that those without demat accounts too could invest.

What works

Apart from being a precious metal, silver also has several industrial uses. So, it could be a tactical bet on economic recovery and growth.

Silver is used in several electronic components – electrical circuits, batteries, LED chips and RFID chips. It also has uses in photovoltaic cells (for solar energy), medicine, nuclear reactors, gadgets, electric vehicles, etc.

“Industrial use for silver has been growing rapidly. Due to this trend, silver tends to get consumed and doesn’t get recycled. So, if the demand rises, it could push up silver prices,” says Chintan Haria, head-product development and strategy, ICICI Mutual Fund.

Since 2020, silver prices have outperformed gold prices (see: table), but over a 10-year period, gold has given better returns.

Just like gold, silver may also serve as a hedge against inflation. Silver tends to move in the direction of gold prices, although with a lag. This is because silver is seen as a low-cost replacement for gold.

“When gold prices shoot up, the demand shifts to silver and then silver prices start to go up. Similarly, when gold prices go down, the demand switches back to gold from silver and silver prices start to decline,” says Rahul Kalantri, vice-president (commodities), Mehta Group.

What doesn’t

While there is may be some link between gold and silver prices, this is not always the case. For example, during periods of economic slowdown, gold prices could rise due to the yellow metal’s safe-haven status and silver prices could still fall due to slowdown in industrial output.

Analysts say that if global economic growth is not supportive, silver may not add value to investors’ portfolios.

The stability of gold prices has made it a preferred hedge against inflation than silver.

Rupesh Nagda, founder and managing director of Family First Capital, says that the volatility of silver prices may deter investors from holding it over the long-term.

“Silver has a higher beta and so its prices tend to see more sharp movements than gold,” points out Haria.

Moneycontrol’s take

A gold-linked investment product should suffice for investors looking for diversification and hedging against inflation. It would do well as a cushion against equity-linked volatility as well. Investors looking for further diversification can look at the silver ETF for small allocations in their overall portfolio. The NFO is open till January 19, 2022.

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