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The exchange-traded fund (ETF) tracks an index, sector, or commodity and can be sold or bought on a stock exchange just like a stock. We had the gold ETFs in India since 2007 and now the Securities and Exchange Board of India (SEBI) has laid guidelines that will allow for the introduction of silver exchange-traded funds (ETFs).
Investors will now be able to invest in silver in a more liquid manner that would help them to diversify the investment portfolio according to their asset allocation plans. SEBI has amended rules and come out with norms for investing in silver ETFs where at least 95 percent of the assets would be in silver and silver-related instruments. These norms will become applicable from December 9.
The ‘Exchange Traded Commodity Derivatives’ (ETCD) having silver as the underlying will be considered as a silver-related instrument for silver. Exposure to ETCD should not be more than 10% of the net asset value of the scheme. The London Bullion Market Association (LBMA) daily silver spot price has been chosen as the benchmark for the silver ETF.
Silver is a luminous grey-white metal and its mining has been done since the 5th century BCE. It is extracted from lead-zinc, copper, gold, and copper-nickel ores. The import of silver in India was near 59 billion rupees in the fiscal year 2021. Silver has a good demand in the country and is a popular gift choice as it is considered to bring good luck. Gold is preferred by the upper-middle and the middle class while silver is liked by the rural population due to its affordability.
Silver is considered both a precious as well as an industrial metal. In the industries, silver finds use in batteries, glass coatings, photography, RFID chips, LED chips, semiconductors, touch screens, computers, etc.
Silver has been for long been traded in the futures market with lot sizes of 30 kg, 5kg, and 1kg. This is a big lot size with the traders having to pay margin money if they want to trade. There are complexities involved and often it is dangerous to trade in a futures contract unless a person is fully aware of the market conditions and factors. But now with the introduction of silver ETFs, an investor would be able to invest in silver and hold for a long time if they wish. Some of the operating norms for silver ETFs are-
Net Asset Value-
The net asset value of the silver ETFs would have to be disclosed on a daily basis on the website of the asset management company (AMC) and shall be calculated up to four decimal points.
Tracking Error-
The tracking error should not exceed 2 %. (It is the divergence of daily returns between physical silver and NAV of silver ETF). The disclosure on the tracking error should be made on a monthly basis on the website of the AMC.
Fund Manager-
A dedicated fund manager with experience in commodities and commodities derivative market shall be appointed to manage the fund. But it is not mandatory to have a dedicated fund manager for each commodity.
Liquidity-
To provide liquidity the units of silver ETFs would be listed on the recognized stock exchange(s). Initially, the volume may be low, but as the product gains popularity the volumes would increase gradually.
Total Expense Ratio-
The total expense ratio for the silver ETF schemes would be the same as the total expense ratio for other ETFs (regulation 42 of MF regulations).
Pros and Cons of investing in silver ETFs-
Pros
1) It provides easy access to the silver markets.
2) The minimum investment amount can be very small as in a systematic investment plan of mutual funds.
3) The associated fees can be lower than the storage and protection fees of physical silver.
4) Convenient to store in Demat account. Physical silver is very bulky if purchased in large amounts.
6) There are no markups and dealer premiums. GST is not applicable for ETFs.
7) No emotions attached like with physical gold and silver.
8) If you want silver jewelry some making charges would be there.
9) Mostly in Demat account so no worry of being stolen like physical silver kept in the house.
Cons-
1) Silver ETF is not like owning physical silver. Can’t touch and feel it.
2) There is a Demat account and annual maintenance fees.
3) There is zero counterparty risk in owning physical silver; you own silver instead of the unenforceable digital claim on silver.
Taxation-
Silver ETFs would likely have the same tax rules as gold Elf’s. For a holding period of more than 36 months, there would be long-term capital gains of 20%. If the holding period is less than 36 months then there would be short-term capital gains according to the tax slab rate.
Silver is a precious metal as well as an industrial commodity. For those investors who wish to invest in silver, it would be a good opportunity as even small investors would be able to invest in the silver ETFs. There would be no purity issues and risks as in holding silver in its physical form. ETFs are cost-efficient and allow investors and traders a scope to participate in the underlying commodity, providing them a route for diversification of their portfolio.