28 Feb, 2025
4 mins read
Investing in silver has held a special significance in Indian culture. This along with gold had been one of the traditional ways in which Indians have always invested. With the advent of Silver Exchange-Traded Funds (ETFs), accessing the silver market has become more straightforward and cost-effective. In this article, we dig deeper into Silver ETFs, their workings, benefits, features, taxation, and the regulatory framework governing them in India.
Silver ETFs are like mutual funds but traded on stock exchanges, designed to track the price of silver. By investing in these funds, you can gain exposure to silver without the challenges of purchasing, storing, or securing physical silver. In India, regulatory guidelines ensure that Silver ETFs invest in physical silver of high purity, typically 99.9%, aligning with the London Bullion Market Association (LBMA) Good Delivery Standards.
Silver ETFs function by pooling investors' funds to purchase physical silver, which is securely stored in vaults. The value of these ETFs fluctuates according to the spot price of silver in the market.
As an investor, you can buy and sell units of Silver ETFs using your Demat account on stock exchanges, similar to trading shares. This mechanism provides liquidity and eliminates the logistical concerns associated with owning physical silver.
You can buy any number of silver ETFs. One unit of Silver ETF is roughly equal to one gram of silver.
Investing in Silver ETFs comes with several compelling advantages:
High Purity Standards: Silver ETFs invest in physical silver bars with a purity of 99.9%, ensuring premium-quality holdings.
Hassle-Free Investment: Investors avoid concerns related to theft, storage, and insurance, as the physical silver is securely held by a SEBI-registered custodian.
Affordable and Flexible: Investors can start small, as one unit of a Silver ETF generally corresponds to approximately 1 gram of silver, making it accessible to retail investors.
No Lock-in Period: Silver ETF units can be freely bought and sold on stock exchanges at real-time prices, and large investors can transact directly with mutual funds in creation unit sizes.
Diversification Opportunity: Silver ETFs enable easy diversification into commodities as an asset class, helping investors achieve their desired asset allocation.
Low Correlation with Indian Equity Markets: Silver has historically exhibited a low correlation with Indian stock indices, making it a valuable asset for risk-adjusted returns.
Inflation Hedge: Silver investments can act as a hedge against inflation, helping protect purchasing power during economic downturns.
Key characteristics of Silver ETFs include:
High Purity: Investments are made in silver with a purity of 99.9%, adhering to international standards.
No Storage Hassles: The responsibility of storing and securing the silver lies with the fund, not the individual investor.
Regulated Expense Ratio: The Securities and Exchange Board of India (SEBI) mandates that the expense ratio for Silver ETFs cannot exceed 1% of the assets under management, ensuring cost-effectiveness.
Transparency: Regular disclosures and audits provide investors with clear insights into the holdings and performance of the ETF.
The Union Budget of 2024 introduced significant changes to the taxation of Silver ETFs in India, aiming to simplify and rationalize the capital gains tax structure.
Definition: Gains from the sale of Silver ETF units held for 12 months or less.
Tax Rate: These gains are taxed at the investor's applicable income tax slab rate.
Definition: Gains from the sale of Silver ETF units held for more than 12 months.
Tax Rate: Such gains are taxed at a uniform rate of 12.5% without indexation benefits, effective from July 23, 2024.
Uniform Tax Rate: The LTCG tax rate has been standardized to 12.5% across various asset classes, including Silver ETFs, eliminating previous disparities.
Removal of Indexation Benefit: The indexation benefit, which adjusted the purchase price for inflation, has been removed for LTCG on Silver ETFs.
Holding Period Adjustment: The holding period to qualify for LTCG taxation on Silver ETFs has been set to more than 12 months, aligning with equity investments.
SEBI has established comprehensive guidelines to regulate Silver ETFs:
Investment Mandate: At least 95% of the assets must be invested in physical silver and silver-related instruments.
Purity Standards: The silver must have a minimum purity of 99.9%, ensuring high-quality holdings.
Expense Ratio Cap: The expense ratio is capped at 1% of the assets under management, promoting investor-friendly practices.
Tracking Error: Fund houses are required to keep the tracking error within 2% to ensure the ETF's performance closely mirrors the underlying silver prices.
Silver ETFs present a convenient and efficient avenue for investing in silver, offering benefits such as high purity, cost efficiency, and regulatory oversight. However, like all investments, it's crucial to conduct thorough research and consider your financial objectives and risk appetite before investing.
Silver ETFs can be suitable for beginners due to their simplicity and accessibility. They offer a straightforward way to gain exposure to silver without dealing with the complexities of purchasing and storing physical metal. However, it's essential to assess your risk tolerance and investment goals, as silver prices can be volatile.
Investing in Silver ETFs provides advantages such as liquidity, no storage concerns, and lower transaction costs compared to buying physical silver. Physical silver, while tangible, entails storage and insurance expenses and may present challenges in terms of liquidity when selling.
While Silver ETFs offer several benefits, they also come with certain risks:
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