Silver ETFs

What is Silver ETFs?

A Silver ETF (Exchange Traded Fund) is a financial instrument that gives investors exposure to silver without purchasing, storing, or insuring physical metal. The fund buys and holds silver (or silver-based instruments) in such a way that its Net Asset Value (NAV) changes in line with the current silver prices.

Why Invest in Silver ETFs?

Silver Exchange-Traded Funds are investment tools that are used to track the price of silver in the market. Some of the key reasons to invest in the Silver ETF include:

• Inflation Hedge: You can begin with a minimal amount, which is much less than the cost of silver coins or jewellery.
• Industrial Demand: Industrial demand shapes Silver ETF performance by increasing silver’s price if manufacturing, solar, and electronics sectors expand their need for the metal.
• Low Cost of Entry: You can begin with a minimal amount, and the exact cost depends on the platform that you trade Silver ETFs on.
• High Liquidity: ETFs are traded at any time of the day in the market with no lock-in period.

How Does Silver ETF Work?

Investing in Silver ETF starts with an Asset Management Company (AMC), which initiates the process and trades it in the stock exchanges like the NSE and BSE. The AMC gathers funds among investors and invests them in purchasing physical silver bars of 99.9% purity.

• Unit Denomination: The silver is further subdivided into smaller units, which makes the investment affordable. For example, if the AMC purchases 1 kg of silver, it can issue 1,000 units.
• NAV and Pricing: The Net Asset Value (NAV) of the silver ETF is computed on a daily basis, including fund charges.
• Buying and Selling: Investors can buy or sell ETF units through brokerage platforms.
• Returns and Costs: The returns to investors are subject to the movement of silver. Assuming that silver goes up by ₹72 to ₹80 per gram, ETF units can also increase, subtracting the annual expense ratio and the cost of brokerage.

Types of Silver ETFs in India

Silver ETFs are created mainly to allow investors access to silver in either physical form or a combination of derivatives and physical assets. Various strategies are used by fund houses to achieve balance in purity, liquidity, and efficiency in tracking.

In this context, some of the key types of top silver ETFs traded in India are as follows:

• Physically Backed Silver ETFs: These ETFs invest in physical silver of 99.9% purity that is deposited in secure vaults.
• Derivatives-Linked Component ETFs: The regulations set by the Securities and Exchange Board of India (SEBI) allow Silver ETFs to invest up to 10% of their assets in Exchange Traded Commodity Derivatives (ETCDs), where silver is the underlying asset.
• Fund-of-Funds (Silver FoFs): These ETFs do not let you purchase silver directly. Instead, they invest in the Silver ETFs that are already in place.
• Futures-Based Silver ETFs: These ETFs follow the price of silver through silver futures contracts and not through physical positions.

Advantages of Investing in Silver ETFs

Silver ETFs bring a highly accessible and regulated means of investing in silver with the following advantages:

• Low Storage Risk: Silver ETFs are not required to be stored in safes, which reduces the concerns about safety.
• Diversification: Silver ETFs help to balance your overall portfolio because their prices often move independently, differing from stock market indices.
• Industry Upside: Growing industrial demand for silver in sectors like electronics, solar energy, and EVs manufacturing can increase its value in the market.
• Convenience and Security: Silver ETFs are stored in secure vaults by custodians regulated by SEBI, which reduces the chances of loss or theft.
• Liquidity: The units are traded during the market hours at stock exchanges, just like shares.

Risks & Challenges of Silver ETFs

Silver ETFs provide an easy method of investing in silver, but they are not risk-free. Key risks and challenges of Silver ETFs include:

• Price Volatility: Silver is directly linked with industrial usage for projects related to installing solar panels or the production of electronic products. Fluctuations in these sectors can significantly impact the prices of Silver ETFs.
• Tracking Error: Even though Silver ETFs are set to follow the price of silver, the actual returns may vary. The expense of funds, SEBI fees and usage of derivatives may cause a disparity between the performance of the ETF and the spot price of silver.
• Liquidity Concerns: Some Silver ETFs trade with low volumes. This situation leads to lower liquidity and investors could end up paying more while buying or selling the holding at a discount.
• Industrial Price Sensitivity: Industrial price sensitivity raises the risk of volatility in silver due to changes in commodity prices.

Who Should Invest in Silver ETFs?

Silver ETFs are advantageous to investors who wish to gain investment benefits from the metal without the physical storage. They are efficient in terms of diversification, cost-effectiveness and regulated market access. Before investing in the best silver ETFs, you can consider:

• First-time Investors: They can get started with minimal amounts in stock exchanges.
• Long-time Investors: Investors are eligible to a 20% tax with a 36-month indexation, which increases after-tax silver ETF returns.
• Investors who Prefer Liquidity: Exchange-traded funds can be bought or sold at any time throughout the market day.

Factors to Consider Before Investing in Silver ETF

An investor must look beyond easy exposure to silver before settling on good silver ETFs. Here are the following factors you need to consider:

• TER: ETFs incur a management fee that is usually between 0.5%-1% per year. This Total Expense Ratio (TER) might appear small, but over the years, it multiplies into a significant drag on silver ETF returns.
• Liquidity and Trading Volume: Certain ETFs of silver are not well traded at NSE and BSE. Under low liquidity, the bid-ask spread increases, and you may get the value at a premium or discounted price.
• Tracking Differences: The goal of an ETF is to track the price of silver, but the expenses of the fund, holdings in the form of derivatives, and other fund charges may create a gap.
• Bid Ask Spread: A wider bid-ask spread increases trading costs for investors by making it more expensive to buy or sell a Silver ETF.
• Regulatory Caps: Regulatory caps influence how closely a Silver ETF can track silver prices by limiting its exposure to physical silver or derivatives.

Taxation on Silver ETFs in India

Tax treatments on Silver ETFs depend on multiple aspects. Here are the most influential factors as follows:

• Holding Period: The holding period of Silver ETFs is subject to the investor’s profile and overall returns gained.
• Short-term capital gain (STCG): The gains are short-term when the units of Silver ETF are sold before thirty-six months. Such gains are included in the total taxable income of the investor in that financial year.
• Long-Term Capital Gains (LTCG): When the holding period is 36 months or above, the gains are subject to taxation as long-term. Here, the tax will be levied at 20% on all investors, irrespective of their income level.
• Indexation Benefit: Indexation is placed as an important feature for long-term investments. It helps to adjust the purchase cost of Silver ETFs by using the Cost Inflation Index (CII) released by the Income Tax Department. By increasing the cost base, indexation ensures that tax is applied only on actual gains above inflation.

How to Invest in Silver ETFs via Kotak Securities

Investment in Silver ETFs using Kotak Securities is done online in the same manner as equities. The steps include having a demat account to store ETF units and a trading account where the buy or sell orders can be placed.

To invest in Silver ETFs, here’s what you need to do:

• Open a Trading and Demat Account: Open a trading and demat account with Kotak Securities and do the KYC verification by following the on-screen instructions.
• Open Kotak Securities Platform: Access your account through the Kotak Securities site or mobile application.
• Search for the Silver ETF: Enter the name of the scheme in the search box. The platform also displays the current price, NAV and market depth.
• Place a Buy Order: Choose how many units you wish to buy, put them on the order form and confirm the trade. Later, the corresponding units will be deposited into your demat account.
• Set Up SIP: Kotak also allows you to make purchases on a fixed schedule by turning on a Systematic Investment Plan.

Conclusion

Silver ETFs give investors a secure, transparent and low-cost method to participate in silver’s growth potential without managing it physically. They combine affordability, liquidity and tax efficiency. In order to begin with, you need to open a demat account with a brokerage platform such as Kotak Securities and set up a SIP for disciplined investing.

However, all investments in Silver ETFs are subject to SEBI regulations and market risk. Read all scheme documents carefully before investing.