Silver ETFs

What is Silver ETFs?

A Silver ETF (Exchange Traded Fund) is a financial instrument that provides investors with exposure to silver without them having to purchase, store, or insure 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. Every share of the ETF will be a partial ownership in the underlying silver reserves.

Why Invest in Silver ETFs?

Silver Exchange-Traded Funds (ETFs) are investment tools that are used to track the price of silver in the market. Every share of a Silver ETF corresponds to a particular quantity of pure silver, which is safely stored in depositories under controlled custodians.

Some of the key reasons to invest in Silver ETFs include:

• Inflation Hedge: Silver tends to appreciate in times of inflation, which will help preserve the buying power.
• Diversification: Silver prices are likely to have an independent relationship with stocks and bonds, which may lead to a decrease in the risks of the overall portfolio.
• Low Cost of Entry: Investors are able to begin with low sums, unlike physical silver, where a lot of investment is required initially.
• Confidence Quality: ETFs are secured with 99.9% pure silver, which has been certified to be of quality and is stored safely under control.
• No Storage Issues: Removes the cost and the risk of keeping silver at home or in personal lockers.
• High Liquidity: ETF units are traded quickly and at any time of the day in the marketplace.
• Transparent Pricing: The Net Asset Value (NAV) is always equated with the international prices of silver, which is a fair value.
• Tax Advantages: Long-term holdings are subject to indexation benefits, which lower capital gains tax.

How Does Silver ETF Work?

A Silver ETF starts with an Asset Management Company (AMC), which initiates the scheme 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. These bars are kept in high-security vaults with an independent custodian. As per SEBI guidelines, the custodians and auditors are expected to check holdings on a regular basis and ensure that the ETF is backed by silver. This protects investors against counterfeiting or misreporting.

Unit Denomination

The silver is further subdivided into smaller units, which makes the investment affordable. In most instances, a single unit of a Silver ETF corresponds to one gram of silver. For example, if the AMC purchases 1 kg of silver, it can issue 1,000 units. It is a structure that even small investors can get exposure without investing vast amounts of capital in.

NAV and Pricing

The Net Asset Value (NAV) is computed on a daily basis. It represents the price of a unit of silver in the market, including fund charges. The formula to get Silver ETFs NAV is:

𝑁𝐴𝑉=𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑖𝑙𝑣𝑒𝑟 – 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 / 𝑈𝑛𝑖𝑡𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

So, if silver trades at ₹72 per gram and fund expenses reduce this by ₹0.50, the NAV is ₹71.50.

Buying and Selling

Investors either sell or purchase ETF units or purchase them using their demat account and trading account. Prices tend to remain near to NAV, but there are minor variations that are caused by demand and supply. To maintain the ETF price at a level that matches that of silver, Authorised Participants will intervene to create or redeem units. The liquidity is based on the trading volumes, but it is usually significantly higher than that of selling physical bars or coins.

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 will also increase, subtracting the annual ratio of expense (usually 0.5-1%) and the cost of brokerage. In contrast to jewellery, there are no making charges or deductions of purity made on Silver ETF purchases or sales.

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 Silver ETFs traded in India are as follows:

• Physically Backed Silver ETFs: These invest nearly all in bars of silver of 99.9% purity or above that are deposited in controlled vaults by separate custodians. Since ETF holdings are physical, the price of the ETF will move near the spot price of silver.
• Derivatives-Linked Component ETFs: The regulations allow Silver ETFs to invest as much as approximately 10% of their assets to Exchange Traded Commodity Derivatives (ETCDs) where silver is the underlying asset. This part assists the fund to maintaining liquidity and meeting the redemption requirements without the need to sell physical silver.
• Hybrid Silver ETFs: Certain ETFs have physical silver and derivative exposure. This strategy will offer the safety of physical support and allow the fund to reduce expenses and enhance liquidity.
• Fund-of-Funds (Silver FoFs): These plans do not purchase silver directly. They instead invest in the Silver ETFs that are already in place. They can be accessed by investors with no demat account, thus making them appropriate to those choosing the mutual fund path.
• Futures-Based Silver ETFs: These follow the price of silver through silver futures contracts and not through physical positions. Although these products are common in international markets, they are limited by regulations and could have increased tracking errors due to futures roll costs.

Advantages of Investing in Silver ETFs

Silver ETFs are an easy and regulated means of investing in silver without the hassles of storing or purity testing, and purchasing in large quantities. In this context, some of the key advantages of investing in these ETFs include:

• Convenience and Security: The silver is secured by custodians in regulated vaults, which helps to keep the silver safe and minimise the chances of its loss or theft.
• Purity Assurance: The ETFs contain 99.9% pure silver, which is confirmed by autonomous auditors. This gets rid of fears of adulteration or weight variation that is prevalent in physical purchases.
• Affordability: Rather than purchasing silver by a certain weight, the investor is able to purchase ETF units, which are often only 1 gram of silver. This entry is low enough to allow small investors to join.
• Liquidity: During the trading hours, the units might be sold or purchased on the exchanges, which provides an easy entry and exit way- this is not the case with physical silver, where a dealer or jeweller must be located.
• Transparent Pricing: ETFs have a daily update of Net Asset Value (NAV) that closely follows the domestic silver prices, and provides a clear understanding of the valuation.
• Lower Costs: They do not have a making charge or wastage deductions for jewellery. The cost is only paid by the investor as a ratio of the expense (0.5-1%) and as brokerage fees.
• Tax Efficiency: After a period of 36 months, the silver ETFs have a long-term taxation on capital gain with indexation, which may lower the effective tax liability than selling actual silver.

Risks & Challenges of Silver ETFs

Silver ETFs are an easy method of having an exposure to silver, but they are not risk-free. Before making them part of a portfolio, investors must know the possible negative aspects of these.

Thus, key risks and challenges of Silver ETFs include:

• Price Volatility: Silver is an industrial and a precious metal. Demand in areas such as solar panels or electronics is subject to sharp fluctuations, whereas global economic uncertainty will also impact the prices. This may result in larger price movements compared to gold, resulting in unexpected returns.
• Tracking Error: Even though Silver ETFs are set to follow the price of silver, the actual returns may vary. The expense of funds, custodian fees and utilisation of derivatives (allowed up to 10%) may cause a disparity between the performance of the ETF and the spot price of the metal.
• Liquidity Concerns: Some ETFs have thin trading volumes. Low liquidity implies the investor might not necessarily be able to buy or sell units at the NAV, in some instances paying a premium or selling at a discount.
• Expense Ratio: Although it is less expensive than physical storage costs, the ratio of the annual expense (usually 0.51) is gradually consuming returns, particularly at times when silver prices remain still.
• Tax Treatment: The profits are taxed in the same manner as debt funds. If the selling of the units occurs in a period of less than 36 months, the profits are included in the taxable income, which may be expensive to the investor in the higher tax bracket.
• No Regular Income: Silver ETFs do not yield interest or dividends, unlike bonds or dividend stocks. The returns are determined by the appreciation of the asset only.

Who Should Invest in Silver ETFs?

Silver ETFs are beneficial to investors who desire the security of silver prices but do not want the inconvenience of holding the actual metal. They are efficient in terms of diversification, cost-effectiveness and regulated market access.

Key influential factors that you can consider to invest in Silver ETFs:

• First-time Investors: They can get started with minimal amounts in stock exchanges.
• Diversified Investors: The dual purpose of silver (industrial and precious metal) may be used to decrease overall correlation to equities and bonds in the portfolio.
• Individuals avoiding storage and purity risks: ETF shares have 99.9% pure silver in secure depositories, and there is no verification hassle.
• Cost-conscious Investors: No making charge and wastage deductions for jewellery; there is a low ratio of expenses.
• Long-time Investors: Investors are eligible to a 20% tax with a 36-month indexation, which increases after-tax 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 a Silver ETF. These funds are structured products, and their value is not only determined by the price of silver, but also by the manner in which the fund is managed, traded and taxed.

Thus, here are the following factors you need to consider:

• Expense Ratio: ETFs incur a fee of management that is usually between 0.5%-1% per year. Expense ratio might appear small, but over the years, it multiplies into a significant drag on returns. Indicatively, when the price of silver is applicable, the investor will continue to lose value to expenditures.
• 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 Error: 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.
• Volatility of Silver: Silver is volatile than gold because it is sought after in the industrial sector, made up of solar panels and electronics. So, it is important to plan your investment portfolio diversification to get the best possible returns.
• Tax Rules: Taxation may differ on individuals' income tax slabs, which makes it essential to review your income to stay compliant with regulatory bodies.

Taxation on Silver ETFs in India

Silver ETFs are taxed according to the regulations of debt mutual funds, but not equities. The tax treatment is determined by the duration of the investment held.

• Holding Period: Taxation of gains of Silver ETFs will be taxed based on the duration of investment. Holding period is also 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 a major characteristic of long-term taxation. The initial cost of purchase is inflated with the help of the Cost Inflation Index (CII), which is released by the Income Tax Department. Indexation decreases the taxable profit by increasing the cost base, which guarantees that only the true gains after inflation are subject to taxation.

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 involve having a demat account to store ETF units and a trading account where the buy or sell orders can be placed.

Some of the key steps include:

• Open a Trading and Demat Account: Open an account with Kotak Securities and do the KYC verification. Your ETF units are held electronically in the demat account and the trading account is used to make transactions.
• 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 on 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 bring 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. Thus, these ETFs make them suitable for both first-time and experienced investors. 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.