In order to enable individuals to invest in silver exchange traded funds (ETFs), the Securities and Exchange Board of India (Sebi) has issued the operating norms after amending the mutual funds regulations to have a mechanism for silver ETFs. Asset management companies (AMCs) can now launch silver ETFs to provide investors with an opportunity to invest in a new commodity.
In India, investors invest in silver through silver bars, silver coins, and silver jewellery and some through silver futures. As in gold ETFs, for silver ETFs fund houses will have to invest at least 95% of the net assets in silver and silver related instruments. The Exchange Traded Commodity Derivatives (ETCDs) having silver as the underlying shall be considered as silver related instruments.
The investment objective will be to generate returns that are in line with the performance of physical silver in domestic prices, subject to tracking error. The markets regulator has underlined that the physical silver shall be of standard 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) confirming to London Bullion Market Association (LBMA) Good Delivery Standards. The NAV of Silver ETFs will be disclosed on a daily basis on the website of the AMC and the indicative NAVs of Silver ETFs will be disclosed on stock exchange platforms, where the units of these ETFs are listed.
The silver ETFs will be benchmarked against the price of silver based on LBMA Silver daily spot fixing price. On liquidity, the units of silver ETFs will be listed on the stock exchange and the AMCs will appoint authorised participants / market makers to provide liquidity for the units of silver ETFs in the secondary market.
The regulator has underlined that the tracking error—the annualised standard deviation of the difference in daily returns between physical silver and the NAV of silver ETF based on past one year rolling over data—should not exceed 2% and it has to be disclosed on monthly basis on the website of the AMC. The physical verification of silver underlying the silver ETF units will be carried out by the statutory auditor of the mutual fund and will report it to the trustees every six months.
What it means for investors
While the introduction of silver ETF will expand the options available for investing in commodities through stock exchanges, investors must note that silver prices can be volatile. However, by investing in silver ETFs, investors will not have to worry about its purity or theft as the underlying asset will be managed by vault managers.
Chintan Haria, head, Product and Strategy, ICICI Prudential AMC, says people have been investing in gold and silver physically as they are considered to be a store of value. “With the growing financialisation, silver ETF will be one more tool along with gold ETF through which investors can participate in commodity markets in a meaningful way. Since silver is bulky in nature and hence difficult to store, we believe the ETF form will be one of the preferred ways for investors to take exposure to silver in financial investment form,” he says.
Priti Rathi Gupta, founder, LXME, says, with the introduction of norms for silver ETFs, investors will be able to invest in silver in a more liquid manner compared to the traditional methods . This can help in diversification of the portfolio as silver has been a precious metal, after gold, to hold the eyes of investors. “There is now uniformity in these product specifications. This makes investing in silver easier, accessible, and transparent for investors, who will benefit from professional fund management,” she says.
So, investors who want to diversify their investment portfolio can invest in silver ETFs along with gold ETFs and benefit from price efficiency.