All You Need to Know about Silver ETFs
Like gold, silver is another popular commodity for Indian investors. However, many people find purchasing and selling a large amount of physical silver too difficult. It becomes even more problematic if someone has to transport silver from one city to another. There is also an added difficulty in storage and safety. Investing in silver Exchange Traded Funds (ETFs) can free you from all these hassle. If you plan to invest in silver ETFs, this blog is for you.
What Is a Silver ETF?
Similarly, Silver ETFs are financial instruments whose underlying asset is silver. The market forces determine the prices of silver ETFs. Silver ETFs invest approximately 95% of their corpus in physical silver or assets like Exchange Traded Commodity Derivatives (ETCDs) in silver. Thus, silver ETFs track the spot price of silver and deliver returns based on the same.
A fund manager of a silver ETF needs to purchase and store silver in vaults. They must also look after periodic audits concerning the physical verification of this silver. Another requirement is that silver ETFs can only invest up to 10% of the entire corpus in silver ETCDs.
How Do Silver ETFs Work?
Silver ETFs track the prices of physical silver in the open market. Demand and supply of silver throughout the trading day influence their price. Any fluctuation will directly influence the NAV of silver ETFs. As market forces determine the price of silver, any fluctuation will directly influence the Net Asset Value (NAV) of silver ETFs.
What Are the Benefits of Silver ETFs?
The points below highlight the important features of silver ETFs.
Hedging Against Inflation
When the inflation is higher, commodities like gold and silver serve as a hedge for investors. Investors can buy silver and gold to safeguard their investments against losses during inflation. When the prices of stocks fall, gold and silver prices increase.
Offers Portfolio Diversification
Investors can diversify their portfolios by investing in commodities like silver and volatile assets like stocks. It will balance their portfolio’s risk, and returns as silver help mitigate overall risks and offer steady returns during inflationary periods.
Purity of Asset
When investing in metals like silver, purity is one of the important concerns to cross our minds. However, you can handle this while investing in a silver ETF. The physical silver that fund managers overlook is 99.99% pure. These are stored in secure vaults and audited periodically.
Therefore, you can rest assured that you are investing in a pure commodity while investing in silver ETFs.
Trading with silver ETFs offers more liquidity than trading with the commodity itself. Purchasing and selling physical silver is quite time-consuming compared to ETFs.
No Storage Cost
Silver ETF eliminates the problem of buying, transporting and storing silver in its physical form. Therefore, as investors, you do not need to bear any costs to store them.
How Are Silver ETFs Different From Physical Silver?
Here are a few differences between silver ETFs and physical silver.
|Silver ETFs||Physical Silver|
|These are available in form of paper certificates and dematerialised forms.||Physical silver is available as bullion, jewellery, coin, and bars.|
|They are highly liquid.||They are moderately liquid.|
|Opportunity for arbitrage is possible with silver ETFs.||Arbitrage is not available with physical silver.|
|Asset Management Companies (AMCs) ensure the safety of silver ETFs.||Investors themselves need to verify its purity.|
|No GST applicable.||GST applicable on physical silver.|
How Are Silver ETFs Taxed?
Like stocks and mutual funds, silver is also a capital asset. Therefore, gains from silver investments are subject to taxation depending on how long the investor holds the investment.
If the holding period is less than 3 years (36 months), the gains will be treated as short-term capital gains (STCG). In the case of STCG, the profits will be added to your income and taxed as per your income tax bracket.
However, holding silver ETFs for more than 3 years will be termed as long-term capital gains (LTCG). As per the Income Tax Act of 1961, LTCG is subject to 20% tax with the benefit of indexation.
With recent change in budget 2023, all the gains will be classified as STCG and normal tax slab rare will be applicable.
Things to Keep in Mind before Investing in Silver ETF
Here are certain things you must consider before investing in Silver ETFs in India.
As an investor, you should analyse the tracking error while trading with any ETF. Furthermore, you must choose to invest in those silver ETFs that have minimal tracking error.
Before investing in silver ETFs, understand your financial standing and risk appetite. Silver ETFs are risky investments as their prices rise and fall according to demand and supply. Therefore, only invest in these ETFs if you are comfortable with risky investments.
Before picking an ETF to invest in, it would be beneficial to check the expense ratio of several silver ETFs. It is also important to remember that the expense ratio and investment returns are inversely proportional. Therefore, a silver ETF with a high expense ratio will reduce your returns and vice versa.
Silver ETFs offer an easy and accessible way for anyone to take exposure to the ups and downs of the commodity’s prices. Consider analysing your budget and risk appetite to know whether they fit your investment goals. You may also seek assistance from financial advisors to see whether you should invest in this asset and plan your finances accordingly.
Frequently Asked Questions (FAQs)
Who should invest in a silver ETF?
Investors willing to diversify their portfolio can invest in silver ETFs. Also, those investors who want to hedge against inflation can choose to trade with silver ETFs.
What is the major difference between silver and gold ETF?
When the economy grows, demand for silver increases faster than gold. Thus, silver is a safer asset for investors during inflationary periods. Silver is majorly uses in industrial production. Gold ETFs are more liquid and provided higher return.
What are exchange-traded derivatives?
Exchange-traded derivatives (ETD) are contracts used for trading in the stock market. SEBI determines the guidelines, expiry date, lot size and settlement process for trading with ETDs.
What are the benefits of trading with ETFs?
They are more transparent and offer simple and hassle-free trading.