Mutual funds flock to silver ETF space with new schemes; collect Rs 1,400 cr assets - what should investors know

Mutual funds have launched a clutch of new fund offers in the silver ETF (exchange-traded fund) category this year and collected Rs 1,400 crore in assets after the introduction of the newly-created investment asset class by the market regulator Sebi (Security and Exchanges Board of India) in 2021.

Further, fund houses including Kotak Asset Management Company have filed draft documents with the markets regulator to float silver ETF as well as silver ETF fund of funds for investors, information from the Securities and Exchange Board of India (Sebi) showed.

These NFOs (new fund offers) are providing an opportunity to the investors to digitally invest and own silver which is easily tradable during market hours.

As per industry data, so far, Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, and Nippon India Mutual Fund have launched silver ETFs. Further, each of these asset management companies has a silver fund of funds (FoF), which in turn invests in their respective ETFs.

In addition, DSP Mutual Fund and HDFC Mutual Fund closed the NFO of their silver ETF earlier this month, while Edelweiss Gold and Silver ETF FOF is currently open for subscription for investors.

The industry has already collected Rs 1,400 crore in assets base from silver funds till July-end, according to data provided by Morningstar India.

The asset management companies are rushing to launch silver funds since Sebi allowed silver ETFs in November 2021.

"The Sebi's move opened up avenues for mutual fund houses to be able to launch silver ETFs. Considering that a lot of investors use silver as a hedge against inflation, this offered an easier avenue for them, wherein they could hold the precious metal in the form of a fund, rather than holding it in the physical form," said Kavitha Krishnan, Senior Analyst ? Manager Research, Morningstar India.

Also, silver has underperformed recently, and this may have triggered AMCs to launch silver ETFs and FOFs as it may be a good time to invest in the precious metal, Radhika Gupta, MD and CEO, Edelweiss AMC, said.

In addition to being used as an investment, silver also finds its way into industrial, and manufacturing sectors. Higher demand for silver from new age industries, like electric vehicles, solar, and 5G, also seems to have created more consciousness among investors about the impact of investing in silver, Krishnan said.

Prior to the introduction of silver ETFs, physical silver and silver futures were the available investment avenues for those looking to take exposure to this asset class.

Physical silver comes with its drawbacks such as purity concerns and price inefficiencies. Futures, on the other hand, were not suitable for retail investors, said Ghazal Jain, Fund Manager- Alternative Investments at Quantum AMC.

"As such, the introduction of silver ETFs is a good development for retail investors looking for investment exposure to silver as an asset class. Like in the case of Gold ETFs, Silver ETFs too will pass on benefits of price efficiency, liquidity, and convenience to retail investors," she noted.

Basically, a silver ETF scheme means a mutual fund scheme that invests primarily in silver or silver-related instruments.

Gupta said silver has many similarities with gold when it comes to investing. It is a good hedge against inflation, has a low correlation with equities, and hence, provides good diversification benefits.

"FOF and ETFs are a convenient and low-cost way for people to invest in silver as compared to physical silver," she added.

Vikram Dhawan, Head Commodities and Fund Manager, Nippon India Mutual Fund, said at current prices, silver is almost 90 times bulkier than gold and therefore needs larger storage, safekeeping, and handling infrastructure.

According to him, silver ETFs offer a convenient, safe and efficient way of investing in silver, and such instruments hold physical silver bars of high-quality matching the best international standards and practices.

However, experts warned investors against rushing into silver ETFs and suggested evaluating its suitability in their portfolio and its investment merit in comparison to gold.

"Because of its once precious metal status, silver to an extent can help in combating the effects of inflation on a portfolio but not as efficiently as gold tends to do. Also since it was delinked as a form of money, silver is largely used in industry, and prices tend to move more in tandem with overall economic growth and hence risk assets," Quantum AMC's Jain said.

Overall, India is the third largest silver physical investment market in the world after Germany and the US. The size of the silver physical investment market in India is roughly USD 1 billion per year.