When it comes to investing in precious metals, global investors opt for gold and silver through the exchange-traded fund (ETF) route. While gold ETFs have been available to Indian investors since March 2007, silver funds were first launched here in January.
Up till now, investors could only invest in silver in the physical form. With silver ETFs, investors need not worry about purity or quality of the underlying asset and it is also free from storage-related hassles. Also, experts say that liquidity and price efficiency is likely to be better as compared to traditional options.
Despite their tepid performance and limited options, silver ETFs today have assets under management (AUM) of around ₹850 crore.
So far, Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund and Nippon India Mutual Fund have launched silver ETFs. Further, each of these fund houses has a silver fund of fund (FoF), which in turn invests in their respective ETFs.
Experts say that silver is considered as a store of value and has limited or low co-relation to other asset classes. Recently, inflows into silver ETFs, especially in the US, improved owing to its role as a hedge in times of uncertainty.
According to a recent report by Motilal Oswal Financial Services, after logging outflows in 2021, global silver ETFs have seen net inflows of nearly 1,175 tonnes so far.
On the other hand, the domestic silver ETF category, which was launched in January 2022, has delivered an average return of -4.56% on a three-month period.
Silver is more a tactical allocation as opposed to gold, which is more a strategic allocation for portfolio diversification. Further, 65-70% of the usage of silver is in industrial applications.
“Till the time geopolitical uncertainty continues and the US Fed remains hawkish, commodities including silver will tend to remain volatile.
Given the situation where inflation remains sticky, silver could perform well due to its role as a hedge against inflation,” said Chintan Haria, head-product development and strategy, ICICI Prudential AMC.
Silver prices had a good start for the year, rallying almost 20%, although after that it witnessed a fall by almost the same pace erasing the gains. According to the Motilal Oswal Financial Services report, Fed’s aggressive stance on the interest rate and balance sheet trimming weighed on the safe-haven assets.
Haria believes that factors such as the increased demand from new-age industries, like those dealing in 5G technology and solar energy, increased application in modern environment-friendly manufacturing, electronic mobility and appliances are some of the factors contributing to an increased demand for the silver metal. However, keep in mind that silver can go through phases of underperformance.
For example, silver futures price was at around $27 level per ounce in May 2012, while their current price is around $22 per ounce.
“If an economic recession is triggered due to prolonged high-interest rates and tight liquidity, silver’s precious metal status could help it to outperform,” said Haria.
Precious metals act as safe havens during times of turmoil, although this is more pronounced for gold. For example, in each of the past instances (global financial crisis, taper tantrum, and covid-19) silver has performed well .
“Also, increasing applications in new-age businesses should help silver outperform other asset classes during the recession,” the expert said.
Financial advisors suggest having 10-15% allocation to precious metals.
However, the question an investor needs to ask is whether such a fund fits into his or her assets allocation and can help achieve a financial objective or goal.