Markets regulator SEBI's decision to introduce silver exchange-traded funds (ETFs) will bring in another investible commodity for retail investors looking for investment exposure to the metal as an asset class, experts said on Wednesday.
Like in the case of gold exchange-traded funds, silver ETFs too will pass on the benefits of price efficiency, liquidity and convenience to retail investors, Chirag Mehta, senior fund manager - Alternative investment - at Quantum Mutual Fund, said.
Currently, Indian mutual funds are allowed to launch ETFs tracking on gold. Gold ETFs collectively manage assets to the tune of Rs 16,350 crore as of August 31, 2021.
In a significant move, the board of SEBI on Tuesday approved an amendment to mutual fund rules to enable the introduction of silver ETFs with certain safeguards in line with the existing regulatory mechanism for gold ETFs.
This has been a long-standing demand of commodity market participants.
CPAI President Narinder Wadhwa said the move will expand the bouquet of ETFs.
"The silver ETF will be backed by physical silvers. This will also increase the existing volumes of silver and bullion index as many arbitrage opportunities will exist with the introduction of silver ETF," he added.
Gold ETF has been in existence since 2007 and has seen exponential growth in the investor base. Gold along with silver has been a preferred investment class for many decades.
He, further, said that previously metals such as silver platinum, platinum were a way to diversify one's portfolio from a single precious metal.
According to Quantum MF's Mehta, the introduction of Silver ETFs is a good development for retail investors looking for investment exposure to silver as an asset class.
However, investors need to understand that the portfolio diversification benefits of gold are much higher than silver and it has to be evaluated based on its investment merit. For now, we will have to wait for the operational details of silver ETFs to come in.
Kaustubh Belapurkar, Director - Manager Research, Morningstar India, suggested that investors should be judicious with their investment and allocation as silver prices like any other commodity can be volatile.
While passive investment culture was evolving decently over the last couple of years, the size of the ETF market still accounts for 11 per cent of the mutual fund industry's assets under management (AUM).
Welcoming the launch of silver ETFs in India, Deepak Singh, Chief Business Officer at Reliance Securities, said silver has been a preferred physical investment class like gold for millions of Indians over the years.
"While we are not sure how fast silver ETF will grow in India, given the fact that Gold ETF was launched in 2007 and this still accounts for mere 0.45 per cent of industry's AUM. However, this will surely help mutual funds to offer an additional product to investors," he added.
Swapnil Bhaskar, Business Head, Niyo Money, said the introduction of Silver ETF will expand the options available for investing in commodities through stock exchanges. This can be a game-changer as it deepens the securities market for investors.
He noted that Indians have a deep-rooted love for buying gold and silver. The silver ETF will give them a seamless way of buying silver. They don't have to worry about its purity or theft, unlike a case for the physical holding of silver, as the underlying asset will be managed by the professional vault managers.
Arshad Fahoum, Chief Product Officer, Market Pulse, too believe that silver ETFs could provide a great opportunity for long term investors to diversify their existing portfolio.
This is especially advantageous since investors looking to gain exposure to silver prices can now do away with the drawbacks of buying physical silver; such as holding costs and theft risk, he said.
"Silver ETFs would make investing in silver as simple as buying or selling stocks and hence, would bring along increased liquidity. Opting for a silver ETF would be a sound decision for risk-averse commodity investors too, since silver derivatives would be too risky, given their investor profile," he added.
More importantly, silver as a precious metal has a range of industrial uses, which makes it a fairly stable storehouse of wealth on the long term horizon, which in turn makes it a strong hedge against stocks or bonds.
"With equity markets at all-time highs, looking at rebalancing one's portfolio to invest a small part in a silver ETF is a prudent approach during times of heightened volatility," Fahoum said.
Globally, silver is traded as an integral part of investor portfolios. In India, investors invest in silver through many ways like the traditional route - silver bars, silver coins, and silver jewellery, and if they would rather not deal with physical silver, they invest through paper forms of silver too like silver futures, etc.
"The regulator is expected to continue with the same practice of making fund houses own physical silver bars for silver ETF. By using this physically-backed strategy, this fund can eliminate the issues of contango and backwardation and give investors more realistic pricing of the metal it holds," Priti Rathi Gupta, Founder, LXME, said.
To perorate, the physical silver market in India is sufficiently deep to support silver, moderating the impact of external factors, leading to price fluctuations, she added.
Even though silver and gold work in parallel, she said that silver has its own market dynamics. Hence, silver can be a huge success in the financial markets even for retails investors.