Should you invest in Silver ETF?

Silver

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Silver is one of the most used precious metals today and is a key ingredient in many crucial industries. It has come a long way from being used only as jewellery, currencies and limited usage in photography. As a key element of electric vehicles, solar panels, batteries, pharma products and telecom products, demand for silver is growing at a scale unparalleled to its supply and therefore has multiple reasons for price appreciation.

In recent years, a lot of asset management companies like Nippon India MF, Aditya Birla Sun Life AMC, ICICI Prudential AMC have launched new fund offers for schemes. Several other fund houses plan to launch silver funds in the market.

History

Dating back to November 2021, the Securities and Exchange Board of India declared operating norms for silver exchange-traded funds. Until then, AMCs were only permitted to launch gold ETFs. The permission from the market regulator has led to a rush among mutual fund houses to apply for and launch such schemes in the market,+.

Hedge against inflation

This precious metal acts as a hedge against inflation since its prices are highly linked to general prices levels in the economy. Due to the limited correlation of silver to other asset classes, investors across the risk spectrum can consider investing in silver. Moreover, silver is a precious commodity that has been delivered during times of crisis as well.

Silver ETFs

Silver exchange-traded funds or ETFs work like Gold ETFs where units are backed by physical silver. The performance of the funds will be benchmarked against the domestic price of silver as derived from the LBMA or the London Bullion Market Association. Physical silver can also be of 99.9 per cent purity, meaning investors will not have to worry about issues like purity levels and how to store the silver.

Through ETFs or fund of fund route, investors can invest in small denominations and there is also the advantage of easy liquidations

Over a long period of time, Indian investors have been exposed to gold ETFs. two principal reasons given for investing in gold have been that it is a hedge against inflation and has a low correlation with stocks. For the second reason, gold does well when stocks are down and hence acts as a good diversifier. However, neither of the properties work well for silver, as it does for Gold.

Should you invest?

Silver can be a tactical play or a long-term holding depending on the investment objective of investors but the allocation should be minimal. Gold should have a larger share as it has a better hedge, has a lower correlation with other assets, and is much better insulated during slowdowns and slumps in the economy. Within the precious metals portfolio of an investor, they can have 7-10% of it in gold and 0-3% in silver. In the case of more aggressive clients and traders can have a higher allocation in silver, since, for these investors, silver is more of a tactical play due to its higher volatility which is better suited for short-term strategies.

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