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How to Choose the Right Silver ETF for Your Portfolio

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Published Date: 23 Aug 2024Updated Date: 27 Dec 20246 mins readBy MOFSL

Introduction

Exchange-Traded Funds (ETFs) provide you with a way to invest in a diverse range of asset classes, including commodities, stocks, and bonds. Among these, Silver ETFs focus specifically on investing in silver, either through physical silver or silver-related financial instruments. The Net Asset Value (NAV) of these ETFs is closely tied to the current market price of silver.

How Silver ETFs Operate

Silver ETFs are designed to track the spot price of silver, which means their value fluctuates in line with silver’s market price. To maintain this correlation, fund managers acquire physical silver and store it in secure vaults. Regulatory bodies like SEBI (Securities and Exchange Board of India) oversee these funds to protect your interests. Fund managers are required to provide regular auditor reports to verify the physical silver stored in the vaults.

Key Features of Silver ETFs

Purity Assurance: In silver ETFs you will benefit from the guarantee that the silver is of high purity, typically 99.99%. This ensures that the metal held is of high quality and minimizes concerns about purity.

Inflation Hedge: Silver, along with other commodities like gold, is often considered a safeguard against inflation. During economic downturns or periods of high inflation, it can be a prudent strategy for investing in silver.

No Storage Costs: One advantage of silver ETFs is that they eliminate the need for you to manage storage logistics. The fund managers handle the acquisition, storage, and security of the physical silver, saving you from additional costs and logistical concerns.

Risk Reduction: Adding silver to your investment portfolio can help diversify holdings and reduce overall risk. Since silver often behaves differently from other assets, such as equities, it can act as a counterbalance, potentially lowering the portfolio’s overall risk.

Tax Considerations for Silver ETFs

Silver investments are categorized as capital assets and are subject to tax based on holding periods. Gains on silver are considered long-term capital gains and are subject to a flat 20% tax rate if the metal is held for longer than 36 months. On the other hand, gains are regarded as a short-term capital gain and are subject to income taxation based on the individual's tax rate if the holding period is less than 36 months.

 Factors to Evaluate Before Investing in Silver ETFs

·        Risk Tolerance: Prior to investing in silver ETFs, you should evaluate your level of risk tolerance. Compared to other assets like gold, silver can be more volatile, so you must be prepared for possible price swings.

·        Expense Ratio: Comparing the expense ratios of various silver ETFs is crucial. A higher expense ratio can erode returns, so it is beneficial to choose ETFs with lower fees to maximize investment gains.

·        Tracking Error: An ETF's tracking error indicates how near its performance matches the performance of its benchmark, in this case, the spot price of silver. You should look for ETFs with minimal tracking errors to ensure that the ETF's performance aligns closely with the actual price of silver.

 SEBI Regulations for Silver ETFs

·        Investment Requirements: SEBI mandates that fund houses must invest at least 95% of the ETF’s assets in silver and silver-related instruments. This includes commodities and derivative instruments tied to silver, ensuring that most of the fund’s investments are directly related to silver.

·        Tracking Error Limits: Fund managers are required to keep the tracking error within a 2% range. If the tracking error exceeds this limit, it must be disclosed on the fund's website, providing transparency about the fund's performance relative to its benchmark.

·        Expense Ratio Cap: SEBI has set a cap on the expense ratio for silver ETFs at 1% of the fund’s assets under management. This regulation helps keep management fees in check, which can otherwise reduce your returns.

·        Purity Standards: To ensure high-quality investments, SEBI requires that the physical silver held by ETFs must fulfil the requirements set down by the London Bullion Market Association (LBMA), which stipulate a purity level of 99.99%. This standardization helps prevent fraud and ensures that you are holding high-purity silver.

Conclusion

In summary, Silver ETFs offer a convenient way to invest in silver while avoiding the complications of physical storage. By understanding the workings, features, and regulations of Silver ETFs, you can make informed decisions and potentially benefit from the advantages that silver investments offer.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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