Silver ETF: New asset class to diversify your portfolio with minimal hassle

As the name suggests, Silver ETF is an exchange traded product and thus can be bought and sold on stock exchanges the same way we buy shares.

With SEBI permitting silver ETF, investing in silver is also becoming easier and hassle-free.

Diversification is the soul of investing. It also helps you reduce the risk of having all your eggs in one basket. Equity, bullion, debt and real estate are the main products to diversify your portfolio. Since real estate is a big ticket item, everyone cannot invest in real estate, leaving an average investor with equity, debt and bullion to invest and diversify. We have plenty of investments options for debt and equity.

In this article I wish to discuss why one needs to invest in silver and how to go about it.

Why you should invest in Silver

Gold and silver are broadly two products in the bullion category. Bullion as an asset class provides you safety and liquidity during times of turbulence like the pandemic, fear of war and other geo-political events, and silver being one of component of bullion, it is important for all of us to have some exposure to silver.

Since silver gets consumed irretrievably in traditional industrial uses as well as new uses like for renewable energy and electronics, demand for silver is expected to remain constant and in the long term it is believed that there would be mismatch between demand and supply of silver, resulting in higher appreciation in silver prices in the future.

How silver can be bought

Silver can be purchased in physical form like bars, coins and utensils. We can also take exposure to silver contract on commodity exchanges but commodity exchanges offer you trading options rather than investing options in electronic form. As far as electronic options to invest in gold is concerned, there are plenty of options to invest like gold ETF, gold saving funds, and Sovereign Gold Bonds, but till very recently there were no options available to invest electronically in silver. However, with SEBI permitting silver ETF, investing in silver is also becoming easier and hassle-free. ICICI Prudential Mutual Fund has launched India’s first ever silver ETF in the current month.

What is Silver ETF and why one should invest in it

As the name suggests, Silver ETF is an exchange traded product and thus can be bought and sold on stock exchanges the same way we buy shares. The mutual fund house is required to invest a minimum of 95% of corpus of the fund in physical silver or products like Exchange Traded Commodity Derivatives (ETCDs) where silver is the underlying asset. The fund house can invest upto 10% in the silver ETCD. The fund houses are required to keep the physical silver with third party custodian and are also required to obtain report of auditors for physical verification of such silver at periodical intervals.

Investing in silver through silver ETF helps you save on cost of storage like locket rent as well as insurance premium. Moreover, when you buy physical silver you have to pay the GST (Goods and Service Tax) but no credit is available to you for GST paid when you actually sell the physical silver. This actually reduces the overall return on your investments. Since the fund house though pays GST at the time of physical purchase of silver and gets the credit at the time of sale, effectively GST does not add to their cost of investment.

As you can trade in silver ETF during the market houses, you get the opportunity to take benefit of any price fluctuation during the market hours which is not easy in case of investment in physical silver as you have to physically move the silver but in case of silver ETF you can do it with just a few clicks on your phone or computer.

Silver and gold have a price ratio of 81.1 historically so one can avail the arbitrage opportunity if the ratio gets changed significantly by shifting from one bullion product to another. With both Silver ETF and Gold ETF available in the market, reaping the benefit of arbitrage opportunity is easier.

How are profits on Silver ETF taxed?

Gold and silver both are capital assets and treated as debt products. Your investment in bullion, whether physical or electronic, becomes long term after 36 months. So any profit made on silver ETF will be taxed at a flat rate of 20% if held for more than 36 months. However, if you sell the silver ETF within 36 months of purchase, the profits made are treated as short term capital gains and are treated like your regular income and taxed at your slab rates.

(The author is a tax and investment expert and can be reached at jainbalwant@gmail.com)

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