Investors may take a 5 to 10 per cent exposure to silver.
‘Have a long-term investment horizon when investing in silver ETFs to ride out short-term market fluctuations.’
Silver exchange-traded funds (ETFs) have given a category average return of 16.4 per cent over the past year, compared to 15.1 per cent by gold ETFs.
Edelweiss Asset Management Company launched a silver ETF recently. Nine existing ETFs have assets under management (AUM) of Rs 2,845 crore.
Investors need to understand the nature of this metal before including it in their portfolios.
Rising industrial demand
Rising industrial demand is the key driver of the bullish trend in silver.
“The main factors driving up the price of silver over the past year are geopolitical uncertainties and demand-supply gap over the past two years due to the thrust on green technologies such as electric vehicles, solar panels, and growing adoption of 5G technologies, all of which require silver as a primary component.
“Demand for silver jewellery is also growing,” says A Balasubramanian, managing director and CEO, Aditya Birla Sun Life AMC.
According to a report by the Silver Institute, global demand for silver rose 18 per cent last calendar year to a record high.
The demand came from all major user segments: jewellers, industry, and buyers of silver bars and coins. There was a deficit of 237.7 million ounces in 2022 — a record high.
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Safe-haven investment
Along with gold, silver also acts as a safe investment option during uncertain times.
“Along with its industrial use, silver also has the properties of a safe-haven commodity. It is a cheaper alternative to gold,” says Ravi Gehani, fund manager, DSP Mutual Fund.
Furthermore, there is an expectation that the US Federal Reserve may begin to reduce interest rates next year.
“Easing of monetary policy could weaken the dollar. This could lead to a bull market in precious metals. Even in the past, precious metals have performed well while the US Fed was cutting rates,” says Gehani.
Owning silver through mutual funds
Investing in physical silver is not easy due to the metal’s bulky nature. Storage, purity, and liquidity are other issues.
A better way to invest in silver is through mutual funds. ETFs are a cost-efficient option.
A few fund-of-funds (FoFs) are also available that invest in units of silver ETFs. Both ETFs and FoFs allow small-sized investments. FoFs also enable investors to run systematic investment plans.
“ETFs are listed and traded, so they provide liquidity, transparency, and safety. Compared to investing in physical silver, silver ETFs generally have lower impact cost.
“Investors don’t have to worry about storage, insurance, or other incidentals associated with holding physical silver,” says Vikram Dhawan, head-commodities and fund manager, Nippon India Mutual Fund.
Balasubramanian says he expects silver ETFs to provide good returns in the future, albeit with considerable volatility.
The silver versus gold debate
Both gold and silver ETFs are now available, so investors are likely to wonder which of the two would provide better returns in the near future.
“Generally, silver follows gold in terms of return dynamics. When the gold-to-silver ratio increases, silver delivers better returns,” says Balasubramanian.
Gehani agrees. “What stands out for silver vis à vis gold is its industrial demand. Almost 50 per cent of its demand comes from industries whereas for gold it is about 7 to 10 per cent.”
“During commodity bull cycles, silver tends to outperform gold,” he says.
Dhawan believes gold provides better risk protection.
“Silver tends to underperform gold during times of economic uncertainties and recessions. The historical volatility of silver has also been higher than that of gold,” he says.
What should you do?
Investors may take a 5 to 10 per cent exposure to silver.
“Invest a small amount on every dip. The longer-term benefits far outweigh the short-term volatility,” says Gehani.
This exposure is in addition to the 10 to 15 per cent exposure to gold.
“Have a long-term investment horizon when investing in silver ETFs to ride out short-term market fluctuations,” says Dhawan.
“Leadership changes hands between various asset classes within two to four years, so an investment horizon shorter than this would be more of a tactical or trading call.”
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
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Feature Presentation: Ashish Narsale/Rediff.com
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