Silver ETF

What is a Silver ETF?

A silver ETF is a type of mutual fund that tracks the price of physical silver and aims to replicate its performance. As with a typical mutual fund, this ETF also pools money from multiple investors and uses the funds to purchase silver of the highest fineness (999.0 parts or 99.9% purity). The physical silver that the fund purchases is stored in high-security vaults by custodian banks.

Although a silver ETF is a type of mutual fund, it differs slightly from traditional funds. The units of the ETF are listed on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Interested investors can buy and sell units of silver ETFs like stocks through a trading account.

By investing in a silver ETF, you can not only effectively gain exposure to silver without physically owning it but also avoid all the risks commonly associated with investing in the precious metal, such as safety and storage.

How Do Silver ETFs Work?

Silver ETFs mirror the price of physical silver. This essentially means that the value of the fund is directly linked to the price movements of the precious metal. For instance, if the price of silver declines, the value of the ETF will also go down. On the other hand, if the price of silver increases, the value of the ETF will rise.

Each unit of a silver ETF represents 1 gram of the domestic price of silver. So, if the price of silver is ₹100 per gram, the ETF's unit price will also be approximately ₹100 or slightly lower (after accounting for the expense ratio). 

Now, suppose you purchase 100 units of a silver ETF at ₹100 each by paying ₹10,000. In this case, you would essentially own 100 grams worth of silver. If the price of the precious metal rises to ₹150 per gram, the ETF's value will also increase proportionately. At this point, you may choose to liquidate your holdings by selling the units on the exchanges at a profit of ₹5,000 (₹50 per unit x 100 units).

Unlike equity or debt mutual funds, silver ETFs are passive investment options that require no active monitoring. Therefore, these funds usually have much lower expense ratios, making them highly cost-efficient investment options. 

Benefits of Investing in Silver ETFs

Silver exchange-traded funds offer a plethora of advantages. If you are looking to buy silver ETFs, here are some of its benefits that you must be aware of.

1. Convenience: With silver ETFs, you can quickly and easily gain exposure to the precious metal without worrying about safety, purity or storage. You can purchase the units at any time during market hours electronically at your comfort. Unlike physical silver, you can also start investing with small amounts.
2. Cost-Efficiency: Compared to traditional mutual funds and other market-linked investment options, the costs associated with a silver ETF are much lower. This cost-efficiency is primarily because the fund is passively managed.
3. Diversification: Since silver is a highly useful commodity that has its uses in manufacturing and as an asset, investing in ETFs that track it is a good way to diversify your portfolio. Silver ETFs could act as a hedge against inflation and economic uncertainties.
4. Transparent Pricing: The prices of silver ETFs are directly linked to the domestic price of silver in the market. This ensures transparency and enables you to track the value of your investments in real time. Furthermore, with these funds, you can avoid the additional markup costs commonly associated with buying physical silver.

Who Should Invest in Silver ETFs?

Silver ETFs can help investors diversify their investment portfolios without having to physically own the precious metal. Here are some kinds of investors who can benefit from including these funds in their portfolios.

1. Conservative Investors: Silver is often seen as a safe and relatively stable asset. This makes investing in silver ETFs attractive for investors with a low tolerance for risk and market volatility. 
2. New Investors: Beginner investors who are new to wealth creation through the financial markets can look to buy silver ETFs. These funds offer an accessible entry point, providing exposure to a precious metal with consistently high demand. 
3. Long-Term Investors: The price of silver has steadily appreciated through the years and has shown immense resilience even during periods of economic uncertainty. Investors with a long-term horizon can consider investing in some of the best silver ETFs to capitalise on its price appreciation. 
4. Diversification-Seeking Investors: Including a precious metal commodity like silver can bring stability and reduce overall investment risk to a portfolio that is largely composed of equity and debt instruments. Investors looking to effectively diversify their investments can invest in silver ETFs.

How to Choose the Right Silver ETF?

Choosing the right fund from the list of silver ETFs can be difficult for beginners. This is because all ETFs track the same underlying asset. However, here are some tried and tested actionable solutions to fund the ETFs that may be right for your portfolio. 

1. Make a Note of Your Goals: Identify whether you are interested in short-term gains or long-term wealth preservation. Silver ETFs may be ideal for both of these goals. They could also help with portfolio diversification and offer a hedge against inflation. 
2. Understand the Fund’s Objectives: Examine the fund’s investment objective to confirm it aligns with your financial goals. It can also help to assess if the ETF is suitable for your risk tolerance and investment time horizon.
3. Evaluate the Fund House: Choose a silver exchange-traded fund from a reputable fund house with a proven track record in managing commodities like precious metals. Such issuers can ensure better fund management, transparency and investor support.
4. Check for Transparency: Ideally, the ETF provider should regularly disclose the fund's holdings. High transparency reassures investors that their investments are genuinely backed by silver reserves and minimises the risk of mismanagement over time.
5. Factor in the Cost of Investing: Apart from the expense ratio, consider additional costs like brokerage fees, demat account charges and taxes. These outlays can significantly impact your overall returns, especially if you are a frequent trader. 

How to Invest in Silver ETFs with Angel One?

Step 1: Log in to Angel One trading account using your mobile number/client ID and password.

Step 2: Select ‘ETF’ on the homepage and choose a Silver ETF from the list of ETFs in India. 

Step 3: Tap ‘Buy’ and choose between the one-time investment and SIP option.

Step 4: Enter your desired quantity and price of the ETF, then click ‘Buy’ to place an order.

Silver ETFs vs Stock Investing

Stocks and silver ETFs are completely different market-linked investment options. If you wish to leverage the financial markets for wealth creation, you must be aware of the differences between the two. Here is a table outlining the key distinctions.

Risk Factors in Silver ETFs

Even the best silver ETFs come with certain risk factors that you must be aware of when investing. Here is a quick overview of some of the key risks involved with these investment funds.

1. Price Volatility: The price of silver is influenced by several factors like global economic conditions, inflation rates and market sentiment. If these factors are unfavourable, even the best silver ETFs can experience price volatility.
2. Currency Risk: Silver is traded globally in U.S. Dollars. As a result, any major fluctuations in currency exchange rates between the Indian Rupee and the U.S. Dollar can affect the value of silver ETFs. 
3. Market Risk: As with any market-linked investment option, silver ETFs are also subject to broader market risks. These include changes in investor sentiment, global economic conditions or geopolitical tensions. Any adverse economic event can negatively affect the demand for silver, which can lead to a decline in ETF values.
4. Tracking Error: Silver ETFs are passively managed by fund houses. Mismanagement, inefficiency in managing the fund or high expense ratios could result in discrepancies between the ETF's performance and the actual price of silver. This discrepancy is known as the tracking error and can lead to lower returns.

Performance Metrics for Silver ETFs

Investing in silver ETFs may seem easy to assess at first glance. However, to find the right options among the many funds in the silver ETFs list, it is essential to consider the following parameters thoroughly. 

1. Expense Ratio: The expense ratio represents the annual fee charged by the ETF provider for managing the fund. A lower expense ratio ensures that more of your returns remain intact. When comparing silver ETFs, try to choose those with lower expense ratios.
2. Returns Over Time: Consistent returns over the long term are a key metric for evaluating a silver ETF’s performance. Compare the fund’s returns against silver’s spot prices across different time horizons to find ETFs with a better potential for future gains.
3. Liquidity: Liquidity determines how quickly you can buy or sell an ETF without a significant effect on the price. A silver ETF with higher trading volumes offers better liquidity and makes it easier to execute trades at fair market prices. 
4. Volatility: Volatility measures the degree of price fluctuations in an ETF. Silver ETFs with higher volatility can offer opportunities for aggressive gains but come with increased risk. For risk-averse investors, funds with lower volatility may provide steadier growth. 
5. Assets Under Management (AUM): The AUM indicates the total funds from investors that are held by the ETF. Larger AUM values indicate generally greater investor confidence and stability. Higher AUMs may also mean reduced chances of fund closure.

Tax Considerations for Silver ETFs

Silver ETFs in India are taxed in a similar manner to gold ETFs. The tax rates were recently altered after the Indian government notified some changes in the Union Budget 2024. To ensure a smoother move from the old to the new tax rules, a transition period was earmarked — from April 1, 2023, to March 31, 2025. 

This is how funds in the silver ETF list are taxed in India.

1. Before April 1, 2023:

For silver ETFs that have holding periods of 36 months or less, profits are considered short-term capital gains (STCG) and the income tax slab rate is applicable to them. For ETFs that have holding periods greater than 36 months, profits are tagged as long-term capital gains (LTCG) and taxed at 20%, with the benefit of indexation. 

2. Between April 1, 2023 and March 31, 2025: 

During this period, all gains from funds in the silver ETFs list are taxed as per the applicable income tax slab rates, whatever the holding period of the funds may be. 

3. After April 1, 2025: 

For profits from silver ETFs earned after this cut-off date, the period to determine whether they are short-term or long-term capital gains is 12 months. STCG will be taxed at the income tax slab rate applicable and LTCG will be taxed at 12.50% without indexation. 

Top 5 Silver ETFs Based on 1-Yr Returns

Note: The silver ETFs list provided here is as of January 22, 2025. The ETFs have been sorted based on their 1-year returns.

1. DSP Silver ETF: This exchange-traded fund is managed by the independent Indian fund house, DSP Investment Managers. It tracks the price of silver in India and has delivered consistent returns over the past several years.

Key Metrics:

• 3Y Return: 29.56%
• Asset (in Rs. crore): 310.46
2. Aditya Birla Silver ETF: A suitable choice for investors who want to buy silver ETFs with low expense ratios, this exchange-traded fund is managed by Aditya Birla Sun Life AMC Limited. In addition to relatively high 1-year returns, the fund has also delivered notable returns of more than 45% over the past 3 and 5 years. 

Key Metrics:

• 3Y Return: 44.26%
• Asset (in Rs. crore): 490.35
3. Axis Silver ETF: Another top silver ETF that reflects the price changes in the precious metal, this fund from Axis Asset Management Company has recorded stable returns over the previous 1-year, 3-year and 5-year periods. This silver ETF is one of the most cost-effective options in this silver ETFs list.

Key Metrics:

• 3Y Return: 66.71%
• Asset (in Rs. crore): 159.36
4. TATA Silver ETF: The TATA silver ETF is also benchmarked against the price of physical gold in the Indian market. At ₹9, the fund’s NAV can appeal to investors seeking low-cost entry options into the market.

Key Metrics:

• 3Y Return: 10.15%
• Asset (in Rs. crore): 138.80
5. ICICI Pru Silver ETF: This silver exchange-traded fund is one of the most trusted ETFs in this subcategory, as evidenced by its asset size of over ₹4,000 crore. The fund is managed by ICICI Prudential Asset Management Company.

Key Metrics:

• 3Y Return: 21.33%
• Asset (in Rs. crore): 4175.51