ICICI Prudential Mutual Fund is all set to roll out India’s first Silver Exchange Traded Fund (ETF), ICICI Prudential Silver ETF, on January 5, 2022. Here’s all you need to know about the scheme.
Precious metals like gold and silver hold financial and emotional value for most Indians. But buying, holding and selling has become increasingly difficult. So, when paper gold in the form of Gold ETFs was launched, it was an effective way of transacting in the yellow metal without the trouble that comes with physical gold. Investors now have the option to invest in Silver ETF.
On the back of rising demand for silver, the capital market regulator, Securities and Exchange Board of India (Sebi), in September 2021 allowed mutual fund houses to launch Silver ETFs in India. Further, on November 25, the market regulator came up with operating guidelines for Silver ETFs.
As per the ruling, a Silver ETF scheme must invest at least 95 per cent of the net assets in silver and silver-related instruments. Exchange-Traded Commodity Derivatives (ETCDs), having silver as the underlying asset, would also be considered a ‘silver-related instrument’. Physical silver must be of standard 30 kg-bars with 99.9 per cent purity (999 parts per thousand) conforming to London Bullion Market Association (LBMA). Also, to bring more transparency, the regulator has asked the fund houses for physical verification of silver underlying the Silver ETF units. This verification will be carried out by the mutual fund’s statutory auditor, who will report to the trustees every six months.
The Scheme
India’s second largest fund house ICICI Prudential Mutual Fund has come up with India’s first Silver ETF. ICICI Prudential Silver ETF will be open for subscription from January 5 till January 19, 2022. The scheme will invest in silver and try to generate returns that are in line with the performance of physical silver in domestic prices. The scheme may also participate in ETCDs with silver as the underlying commodity.
Unlike holding physical silver, investment in the scheme will allow investors to benefit from investing in silver in the electronic form, which provides more liquidity and lower storage costs. A major concern is difference in price at different geographical locations and also the gap between buy and sell prices. The futures market is for very savvy investors, but with the help of Silver ETFs, even small investors can participate and have access to a good price mechanism. Moreover, purity issues and physical metal’s holding risks will not be a hindrance. Liquidity is also higher as one can easily buy and sell as and when required.
“We believe the Silver ETF will be one of the preferred ways for investors to take exposure to silver as one need not worry about the bulky nature of silver, purity, quality or liquidity of the investment. Silver is among the preferred options globally when it comes to investing in precious metals. This is because silver is considered as a store of value, hedge against inflation and has very limited co-relation with other asset classes,” says Chintan Haria, head of product and strategy at the fund house.
Benchmark
ICICI Prudential Silver ETF will be benchmarked against the domestic price of silver as derived from the LBMA prices. During the new fund offer (NFO) period, investors can invest in the scheme as little as Rs 100, and when the scheme will be listed on stock exchanges, you can buy and sell units of the scheme.
Initially, some experts had expressed concern regarding the expense of storing physical silver and that the expense ratio of Silver ETFs would be high. However, in the operating circular, the regulator had requested fund houses to follow mutual fund requirements in setting the scheme's expense ratio. Accordingly, ETFs cannot charge more than 1 per cent of the scheme’s AUM as expense ratio. ICICI Prudential MF confirmed to Outlook Money that the expense ratios of their scheme would be in the range of 60-70 basis points.
Investors must remember that to invest in an ETF, you need a demat account. However, if you don’t have one, don’t be disheartened as the fund house will launch ICICI Prudential Silver ETF Fund of Fund (FoF) on January 13, 2022.The FoF will invest in ICICI Prudential Silver ETF. This will help you take advantage of investing in the silver ETF without having a demat account.
What Should You Do?
Industrial uses of silver are growing rapidly as it has high electrical conductivity. According to the scheme presentation, in 2020, Rs 79,816 crore worth of silver was used for industrial and electronics purposes followed by jewellery for worth Rs 34,985 crore and for investment worth Rs 38,711 crore, globally.
Silver has many roles to play in future technologies such as 5G telecom, electric vehicles and green energy. This opens a new window for consumption and demand for the metal. Experts believe that investors could look at silver as a good investment opportunity for a longer period.
Silver also offers good portfolio diversification, a hedge against inflation and better returns than gold during economic revival over a longer period. You may add precious metals like gold and silver to your portfolio because prices of these assets are usually not correlated with those of other securities such as stocks and bonds, thus reducing the overall portfolio risk. If you want to buy into Silver ETFs, do so for the long term.