MFs launch silver ETFs amid increased demand

By Ruchit Purohit

Mutual fund investors can now look at investing in silver exchange traded funds (ETFs), instead of buying physical silver, where the precious metal is the underlying asset. In a move to enhance participation in the bullion market, the Securities and Exchange Board of India (Sebi) had allowed the launch of silver ETFs in November 2021. Following this, three mutual fund houses have introduced silver ETFs in January 2022, while others are in the process.

While silver prices have dropped from $30.35 in 2012 to $23.84 in 2022, a sharp uptick in prices amid elevated inflation and increased industrial demand cannot be ruled out in the coming years, said analysts. The compound annual growth rate (CAGR) for the preceding three years was also seen at 18% due to the pandemic-driven buying, experts highlighted. Speaking to FE, Chintan Haria, head – product development and strategy, ICICI Prudential AMC, said: “Silver price history shows that during times of rising inflation, there can be an uptick in price. In addition, being a precious commodity, silver has delivered during times of crisis. In each of the past three periods of crisis (subprime mortgage, taper tantrum and Covid -19), which affected global financial markets, silver has outperformed equity as an asset class.”

The white metal tends to act as a hedge against inflation and further remains a tactical allocation, unlike gold, which is a strategic allocation, maintained analysts. Over the last three to five years, the white metal has delivered returns of 50 to 60%. However, it remains comparatively volatile than gold. Tapan Patel, senior analyst (commodities), HDFC Securities, said,” Silver prices in India have given absolute returns of 62% in the last five years while CAGR of 10% for the same period of time. Silver is a quite volatile commodity compared to gold, which gives various opportunities to traders to capture short-term returns considering fundamental shifts, unlike gold.”

So far this year, three mutual fund houses – ICICI Prudential AMC, Nippon India AMC, and Aditya Birla Sun Life AMC – have launched silver ETF and silver ETF fund of funds for investors. ICICI Prudential AMC became the first house to launch the scheme, garnering nearly Rs 270 crore through the offer, whereas Nippon India AMC has garnered close to Rs 170 crore during the period – both fund houses told FE.

Going forward, despite some headwinds in the near- to medium-term due to the tightening of monetary policy by major central banks, analysts expect silver ETFs to be a better opportunity, as it is likely to deliver higher returns than gold, and scale Rs 90,000 in the Indian markets over the coming years. “The demand from green technologies and strong economic recovery will increase silver usage in industries. We can expect silver to give 30-40% returns in the next five years with prices expected to touch Rs 90,000 per kg in the Indian market,” Patel said.

Besides, gains on silver ETFs will be treated as long-term capital gains (LTCG) and will be taxed at 20%. However, if held for less than three years, the profits will be treated as an individual’s regular income and will be taxed at the slab rate.