Why and how should you invest in silver ETFs and FoFs?
Till December 2021, investors had the option of only gold for investing in commodities through mutual funds. But, from January 2022, this is all set to change with mutual fund houses launching silver Exchange-Traded Funds (ETFs) and Fund of Funds (FoFs). The addition of silver in the investment portfolio can help investors diversify at a broader level among asset classes (commodities as an asset class) and further diversify within commodities along with gold. This article will discuss why and how you should invest in silver ETFs and FoFs.
Let us start with answering the first question of why investors should invest in silver.
Why should you invest in silver?
There are several reasons why you should invest in silver. Some of these include:
Potential to give good investment returns - Silver as an investment product has given good returns in the past. Specifically, during the Covid-19 induced fall in February 2020, the price of silver fell to around Rs. 90,000. In the next few months, by September 2020, the silver price more than doubled to touch a peak of around Rs. 1,90,000.
The above chart shows silver has given an absolute return of 63% in the last four years (2018 to 2021)
Investment portfolio diversification - Asset allocation requires investors to diversify into various asset classes such as equities, fixed income, commodities, real estate, etc. Within commodities, investors could invest only in gold ETFs or gold FoFs. But, now that fund houses have launched silver ETFs and FoFs, investors can diversify further into commodities with gold and silver.
Global demand and supply mismatch - As of January 2022, the silver demand is higher than the supply. The higher demand will support the silver prices and is expected to lead prices higher in the future if supply is not able to catch up.
Increasing uses of silver in industrial applications - The usage of silver in new industrial applications is increasing with every passing day. Currently, silver is used in various industries such as solar power generation, electronics, chemicals, soldering, bearings, medicine, electric vehicles, water purification, photography, etc. With so many industrial applications, the demand for silver is increasing every year. It is expected to keep silver prices higher, leading to better returns for investors.
Benefit from Indian Rupee depreciation against the US Dollar - Silver investors benefit from the Indian Rupee depreciation against the US Dollar.
The above chart shows the 15-year rolling returns of silver in US Dollar terms have been 8.33% CAGR. But, due to the depreciation of the Indian Rupee against the US Dollar, the returns of Indian investors in India Rupee terms have been 11.46% CAGR.
Silver has a low correlation with equities
Historically, silver prices have negatively correlated with the movement of Indian equity indices. A negative correlation means when equities are going down, silver prices move up, and vice-versa. Hence, just like gold, it makes silver also a good hedge against Indian equities.
The above table shows the negative correlation between commodities (gold and silver) and Indian equities. From an asset allocation point of view, it makes it apt to diversify an investment portfolio into equities and commodities (gold and silver).
Factors that influence the price of silver
Some of the factors that influence the price of silver include:
Economic outlook - If the economic outlook is uncertain or if there is a recession, the prices of gold and silver go up. Silver acts as a hedge against uncertain events like recession, pandemic, war, political instability, natural calamities, etc,. that lead to a bleak economic outlook.
Industrial applications - Silver has a lot of existing industrial applications, with new ones getting added regularly. More and more industrial applications push the prices of silver higher.
Demand and supply - Industrial applications and demand from the investor community lead to an overall increase in demand for silver. Currently, the supply of silver is lower than the demand, leading to a silver deficit. The silver shortfall will keep existing prices high or push them even higher if supply doesn't catch up.
- Inflation - Inflation is the general increase in the prices of goods and services. Inflation erodes the purchasing power of money. People flock to gold and silver as a hedge against inflation during such times. Hence, during times of high inflation, the price of silver goes up.
How to invest in silver?
Through silver ETF
If you have a DEMAT account and are disciplined enough to invest regularly on your own, then you can invest in the units of a silver ETF. The minimum investment amount is 1 unit which is equivalent to the price of 1 gram of silver.
The silver ETF units are listed on the stock exchanges and traded during market hours. You can buy the units either at net asset value (NAV), discount to NAV, or premium to NAV, depending on the demand and supply of units. The SIP option is not available with ETFs. Sometimes, liquidity can be a problem with silver ETF units.
As an investor, you can invest in silver through a silver exchange-traded fund (ETF) or a silver fund of fund (FoF). As of January 2022, three AMCs have launched silver mutual fund schemes:
- Nippon India Silver ETF and Nippon India Silver ETF FoF
- Aditya Birla Sunlife Silver ETF and Aditya Birla Sunlife Silver FoF
- ICICI Prudential Silver ETF and ICICI Prudential Silver ETF FoF
Through Silver FoF
If you don't have a DEMAT account and wish to make regular investments through a systematic investment plan (SIP), you can invest in a silver FoF. The minimum investment starts from as low as Rs. 100, which is affordable to most investors across income categories. You can purchase and redeem the silver FoF units at net asset value (NAV) with the fund house at any time. There are no liquidity issues with silver FoF units.
Investing in silver FoFs with the Glide Invest App
We saw the various benefits of investing in a silver ETF or FoF in the above sections. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate silver FoFs and other mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved