Silver funds catch investors’ fancy; what’s driving inflows?

silver funds as a category have delivered 26 percent returns on a one-year basis.

Gold mutual funds (MFs) have been the mainstay of investors’ portfolio for years for diversification into commodities. However, over the past year, silver exchange-traded funds (ETFs) have also been getting decent inflows.

Data available with the Association of Mutual Funds in India (AMFI) showed that since April 2023, the first time when the MF  industry body started reporting silver fund inflows, silver ETFs have received Rs 7,683 crore net inflows, compared to Rs 10,588 crore in gold ETFs.

To be sure, silver funds are among the newest asset classes in India, with the first launch in January 2022.

What’s driving investors’ interest?

The folio count for silver funds has grown from around 0.76 lakh at the end of April 2023 to 4.24 lakh at the end of September 2024. Further, assets under management (AUM) have grown from Rs 1,786 crore to Rs 10,840 crore during this period.

According to experts, investors have started to explore beyond gold, and are looking at silver.

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“People are investing because they would have been underinvested or would have never invested in silver. Also, silver has outperformed gold in the recent past. Whenever there is a bull rally in gold, silver outperforms during that period,” said Niranjan Avasthi, Senior Vice President and Head-Products, Marketing and Digital at Edelweiss MF.

ValueResearch data showed that silver funds, as a category, have delivered 26 percent returns on a one-year basis, while gold funds have given 28 percent returns.

What’s driving silver returns?

Silver is a key component in solar panels and other renewable energy technologies. The increasing demand for these technologies has driven up the demand for silver.

Silver is used in various electronic components, including printed circuit boards, conductive inks, and connectors. The growing electronics industry has contributed to the rising demand for silver.

“Also, silver, like gold, is often seen as a hedge against inflation. As prices of goods and services rise, investors may seek assets that can retain their value or appreciate over time. In times of economic uncertainty, investors often turn to precious metals like silver as a safe haven,” said Viral Bhatt, Founder, Money Mantra.

According to experts, taking into consideration the geopolitical disturbance across the Middle East, the uncertainty surrounding US elections outcome, and inflows into gold ETFs in the past few months, the trend for gold and silver remains firm for the rest of 2024, and going into the new year.

"We see gold prices moving higher towards Rs 79,000 per 10 grams and silver towards Rs 1,00,000 per kg mark by the end of 2024,” said Prathamesh Mallya, Deputy Vice-President, Non-Agri Commodities and Currencies, Angel One.

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Further, Avasthi expects silver to do well on two counts.

“Silver has better commercial demand than gold, especially from the semiconductor industry. In terms of demand-supply, there could be periods when there is a gap between demand-supply. So, from a medium to long-term use, silver has a very good prospect,” said Avasthi.

Do silver funds make sense?

Silver can help diversify your investment portfolio. Its price movements often differ from those of other asset classes, including stocks, bonds, and gold. This can help reduce overall risk.
Also, as mentioned earlier, silver can be a hedge against inflation.

“Silver's price can be volatile, but it also offers the potential for significant returns. In certain periods, silver has outperformed gold and other precious metals. Silver may be a suitable investment for the long term, but it may not be appropriate for short-term investments,” said Bhatt.

While exposure to silver can be taken as a tactical bet, diversification into gold and keeping 5-15 percent in the yellow metal is enough for a retail investor's portfolio.