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Indian investors have an emotional and financial soft spot for gold and silver for decades. Besides ornamental purposes, they are also used for investment purposes. You must have purchased them in physical form like jewellery, coins, bars, etc. But we can now invest in gold and silver digitally as well. Gold is already available in other digital forms. Mutual fund companies have introduced silver ETFs lately. Read this article to learn more about Silver ETFs.
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What is Silver ETF?
Silver ETF is an exchange traded fund that invests its underlying assets in silver and silver related instruments. In other words, the ETF portfolio invests up to 95% of its corpus in physical silver that is stored in vaults or products like Exchange Traded Commodity Derivatives (ETCDs). However, the fund house can invest only up to 10% in silver ETCD. Also, the fund house tracks the price of physical silver. It does not hold any stock related to the silver mining business or other such business.
Silver ETFs track the price of silver in open markets. Any fluctuation in silver price will impact the NAV of the ETF. The fund manager purchases silver and secures them in vaults. Also, the fund manager must obtain auditor reports on physical verification of silver stored in vaults at regular intervals. Moreover, SEBI regulates these ETFs and safeguards investors’ rights.
Investing in this fund helps you filter out the problems that arise from investing in physical silver. With this ETF investment, you do not have to worry about purity, storage or insurance concerns. This fund is more liquid than a physical silver, as it can easily be traded in stock markets. Hence, investing in a silver ETF helps you own a quantity of silver corresponding to that exact value.
Features of Silver ETF
The following are the features of silver ETF –
Purity
The physical silver bought by the fund managers is 99.99% pure and stored in secured vaults. Therefore, when you allocate money to these ETFs, you need not worry about the purity of this metal.
Hedging Against Inflation
Investing in silver and gold acts as a tool to hedge against inflation and volatility in equity markets. When prices are rising, silver prices go up during inflation. Silver can be a good investment option to hedge your portfolio during a crisis.
Storage Costs
The fund manager purchases physical silver utilising the fund corpus. The storage and security of silver become the fund house’s responsibility. Thus, you don’t have to pay any storage costs when you invest in silver ETFs.
Liquidity
Holding silver ETF is more liquid than holding the commodity itself, as investors can easily buy and sell the units of ETFs on a stock exchange. Also, the fund managers appoint market makers to ensure ample liquidity of these funds on the stock exchange.
Reduce Portfolio Risk
When you invest in commodities like gold, silver etc., it helps you diversify your overall portfolio by reducing the risk.
Gold ETF vs Silver ETF- What’s the Difference?
Both Gold ETF and Silver ETF are similar in many aspects, although the underlying assets are a significant difference. They both bring diversification to the investor’s portfolio. These precious metals have different factors that drive their demand and prices.
For instance, silver has a high demand in the automobile sector and industries manufacturing electronic goods and services as it is used as a base metal. Hence, when the economy grows, the demand for silver also increases. This makes silver an effective investment to hedge inflation, and it has a higher correlation with the equity market. On the other hand, gold has greater demand and acts as a tool to beat equity market volatility. This is due to the low correlation with the equity market. Moreover, gold is extensively used for jewellery making. Thus, all these factors independently affect the prices of gold and silver in the market.
Silver as a metal is cheaper than gold. Also, silver comes with more storage costs when compared to gold which increases the expense ratio for silver ETFs. Furthermore, silver is not traded in volumes like gold which may attract more price volatility. Gold is purely a precious metal which is more stable than silver, whose price is sensitive to the economic cycles.
Even though silver and gold belong to the same commodity asset class, the investment tool can help diversify your portfolio, allowing a wholesome exposure. However, you should not invest only in one commodity. You can cap your asset allocation based on your risk tolerance level and investment objective.
Recommended Read: Auto Sector Mutual Funds
Who Should Invest in a Silver ETF?
Silver ETFs are ideal for investors who are looking to diversify their investment portfolio. Moreover, they suit investors who want exposure to silver and also want to participate in the market. Since silver ETFs are backed by 99.99% purity, they are relatively low-risk investments. Hence, they suit investors who are looking for low-risk investments in their portfolio.
Silver ETFs reduce the risk and costs of storing silver. Moreover, they are more tax-efficient than physical silver. Hence investors who want to invest in silver with the sole purpose of earning a return and reducing taxes can consider investing in silver ETFs. Silver ETFs track the prices of silver in real-time. Hence investors who want to track their investments on a real-time basis can also consider investing in silver ETFs.
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