Silver ETFS shot in the arm for domestic MFS

Market regulator Securities and Exchange Board of India’s (Sebi’s) move on Tuesday to allow silver exchangetraded funds (ETFS) is seen as a big opportunity for domestic mutual funds (MFS) in their drive to mobilise assets.

Industry participants believe that silver ETFS have the potential of becoming as popular as gold ones, given their appeal among local investors.

“The introduction of silver ETFS will expand the options available for investing in commodities through stock exchanges. This will deepen the securities market for investors. Indians have a deep rooted love for buying gold and silver. The launch of ETFS will give them a seamless way of buying silver,” said Swapnil Bhaskar, business head, Niyo Money. In August, gold ETFS offered by domestic MFS had average asset under management (AUM) of ~16,350 crore. Globally, there are at least four silver ETFS with AUM of more than $1 billion. ishares Silver Trust, the world’s biggest silver ETF, has an AUM of over $12 billion.

Several investors prefer ETFS over buying physical silver as they don’t have to worry about purity and storage, which is managed by the professional vault managers. Despite Indians’ passion for gold and silver, returns generated by the latter over the last 10 year have been poor and prices tend to be volatile.

Data from the India Bullion and Jewellers Association (IBJA) and Zaveri Bazar shows that in the last 10 years silver has generated compound annual growth rate (CAGR) returns of just 1.3 per cent. The returns improve over a shorter term horizon to 5.5 per cent and 17.2 per cent in the five-year and three-year periods, respectively. The year-to-date returns of silver is nearly 28 per cent.

Kaustubh Belapurkar, director – manager research, Morningstar India, said: “Introduction of silver ETFS brings in another investible commodity for investors. Silver ETFS are popular globally along with gold and other precious metal ETFS. Investors should be judicious with their investment and allocation as silver prices like any other commodity can be volatile.”

Sebi has said silver ETFS will be launched with certain safeguards in line with the existing regulatory mechanism for Gold ETFS. “This means the regulator is expected to continue with the same practice of making fund houses own physical silver bars for silver ETFS. By using this...strategy, this fund can eliminate issues of contango and backwardation and give investors more realistic pricing of the metal it holds,” said Priti Rathi Gupta, founder, LXME.