Silver ETF: New asset class to diversify your portfolio with minimal hassle

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As the name suggests, Silver ETF is an exchange-traded product and can therefore be bought and sold on the stock exchange in the same way that we buy stocks.

Diversification is the soul of investing. It also helps you reduce the risk of having all your eggs in one basket. Stocks, bullion, debt and real estate are the main products to diversify your portfolio. Since real estate is such a big business, not everyone can invest in real estate, leaving an average investor with equity, debt, and bullion to invest and diversify. We have many investment options for debt and equity.

In this article, I want to explain why you should invest in silver and how to go about it.

Why invest in silver

Gold and silver are basically two commodities in the bullion category. Bullion as an asset class gives you security and liquidity during turbulent times like pandemic, scare of war and other geopolitical events, and silver being one of the components of bullion, it is important for all of us to have some exposure to silver.

Since silver is consumed irretrievably in traditional industrial uses as well as new uses such as renewable energy and electronics, the demand for silver is expected to remain constant and in the long run it is believed that there would be a mismatch between the demand and supply of silver, which would result in higher appreciation of silver prices in the future.

How to buy silver

Silver can be purchased in physical form such as bullion, coins, and utensils. We may also take exposure to the silver contract on commodity exchanges, but commodity exchanges offer you trading options rather than investment options in electronic form. When it comes to electronic options for investing in gold, there are many options for investing like gold ETFs, gold savings funds, and gold sovereign bonds, but until very recently there was no There was no option available to invest electronically in silver. However, with SEBI enabling the silver ETF, investing in silver also becomes easier and hassle-free. ICICI Prudential Mutual Fund has launched India’s first-ever silver ETF in the current month.

What is the Silver ETF and why invest in it

As the name suggests, Silver ETF is an exchange-traded product and can therefore be bought and sold on the stock exchange in the same way that we buy stocks. The mutual fund house is required to invest a minimum of 95% of the fund’s corpus in physical silver or products such as exchange-traded commodity derivatives (ETCDs) where silver is the asset underlying. The fund house may invest up to 10% in the silver ETCD. Fund houses are required to keep physical silver in a third-party custodian and are also required to obtain the auditors’ report for the physical verification of such silver at periodic intervals.

Investing in silver through silver ETFs helps you save on storage costs like medallion rent as well as insurance premium. Also, when you buy physical silver, you must pay GST (goods and services tax), but no credit is available for the GST paid when you actually sell the physical silver. This actually reduces the overall return on your investments. Since the fund house pays the GST at the time of the physical purchase of silver and obtains the credit at the time of the sale, the GST does not increase its investment cost.

As you can trade silver ETFs during the markets, you have the opportunity to take advantage of any price fluctuation during market hours, which is not easy when investing in physical silver as you have to physically move the money but in case of Silver ETF you can do it with few clicks on your phone or computer.

Silver and gold historically have a price ratio of 81.1, so one can take advantage of the arbitrage opportunity if the ratio is changed significantly when moving from a bullion product to a other. With Silver ETFs and Gold ETFs available in the market, it is easier to take advantage of arbitrage opportunities.

How are Silver ETF profits taxed?

Both gold and silver are fixed assets and are treated as debt products. Your investment in bullion, whether physical or electronic, becomes long-term after 36 months. Thus, any profit made on the silver ETF will be taxed at a flat rate of 20% if held for more than 36 months. However, if you sell the silver ETF within 36 months of purchase, the profits made are treated as short-term capital gains and are treated as your regular income and taxed at your slab rates.

(The author is a tax and investment expert and can be contacted at [email protected])

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