How to invest in silver with minimal hassle and diversify your portfolio

By Balwant Jain
Silver being part of bullion provides the portfolio with much needed diversification

To avoid concentration risk, investment advisors have been advising diversification across various and within asset classes. We broadly have four asset classes to invest in: Equity, bullion, debt and real estate. Due to higher unit cost, real estate is out of reach for most of us leaving us with three main asset classes. For diversification within and outside the asset class for equity one can invest in Indian and foreign equity, for debt there are various products available ranging from bank fixed deposits to corporate bonds to government securities and for bullion gold and silver are the options. 

Why invest in Silver?

There are many reasons why one should invest in silver. To begin with, silver being part of bullion provides the portfolio with much needed diversification. Silver like gold insulates you against inflation. It also shields you from volatility associated with equity market during uncertain times such as war, pandemic, inflation, change in interest cycle and other geo political events.

Silver has always been known for its industrial uses. Usage of silver in new age technology such as renewable energy products, electronics etc. is likely to push the demand for silver in the times ahead. However, it remains to be seen if the supply can keep pace with the demand. This probable mismatch between demand and supply is expected to push the silver prices over the coming years.

Various forms to invest in Silver

One can invest in silver through physical bars and utensils. The other option is to invest in silver derivative contracts which is more of a trading option. Unlike overseas markets, there was no Silver ETFs available in India. Addressing this void, on November 9, 2021, SEBI allowed mutual fund houses to launch Silver ETFs. On the basis of this, ICICI Prudential Mutual fund is launching India’s first silver ETF. The new fund offer period started on 5th January 2022 and closes on 19th January 2022.

What is Silver ETF and how one can invest?

Like gold ETF, silver ETF is a commodity based ETF offered by mutual fund houses wherein 95% of the corpus is invested in silver or silver related derivative products like Exchange Traded Commodity Derivatives (ETCDs) having silver as the underlying product. The investments in silver ETCD cannot exceed 10% of the corpus of the scheme. The physical silver held as a part of silver ETF will be kept with third party custodians and is required to be physically audited by statutory auditors.

How and why one needs to invest in silver ETFs

When you invest in physical silver you have to incur the cost of locker rent for storage as well as insurance premium for risk of theft. Also, there is a GST (Goods and Service Tax) cost at the time of purchase for which credit is not available to a small investor at the time of sale, thus reducing the extent of return.

On the other hand, Silver ETFs are traded on the stock exchanges so you need to have a demat account as well as a trading account for investing in silver ETFs. However, during the NFO, you can apply directly with the fund house but the ETF units will be credited to your demat account.

Silver ETFs offer you liquidity as it can be sold on stock exchange any time you wish. Such an arrangement allows an investor to make the most of any price volatility which is impossible when investing in physical silver.

Moreover, historically gold and silver between them have an average price ratio of 81.1. With the help of gold ETF and silver ETF, one can benefit from any arbitrage opportunity arising due to deviation in the price ratio between these two bullion products.

Taxation of profit on sale of Silver ETFs

For taxation purpose, silver ETF is treated as a capital asset. If the ETF units are sold after 36 months, the profits earned will be treated as long term capital gains and would be taxed @ flat 20%. If sold within 36 months, the profits would be treated as short term capital gains and added to your regular income and taxed at the slab rate applicable to you.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.


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