After the Securities and Exchange Board of India (SEBI) issued the operating norms for Silver Exchange Traded Fund (ETF) and Silver Fund of Fund (FOF) in November last year, there are a lot of discussions about investing in Silver. Many mutual funds have come out with their Silver ETFs or Silver FOF (Fund of Fund) currently. ICICI Prudential Mutual Fund launched India’s first Silver ETF. Nippon India Mutual fund and Aditya Birla Mutual fund are next who are launching Silver ETF and Silver FOF. There is so much advertisement and media publicity for investment in Silver ETF or Silver FOF that investors are finding it very tempting to invest in such investment vehicles. But, whether such investments are for everyone? Whether the investment in silver is as good as gold? Whether the Silver investment is good for your portfolio and aligns with your goals? Let’s discuss these points in detail.
Silver has been in use as money and considered as a store of value for many thousands of years. However, it lost its role as legal tender after the silver standard was ended in 1935 in developed countries. Silver has been in the focus of investment as it is considered as a store of value, hedge against inflation and recession and it has a low correlation with other investment classes such as equity, bond, or real estate. However, there are many associated risks involved in Silver investment and silver can not be substituted for the gold investment due to various reasons as mentioned in the following paragraph.
Risks involved in Silver Investments
Silver price affected by Industrial Demand
Silver is used in various industries such as in the manufacturing of Solar Panels, electrical switches, batteries, computers, mobiles, etc. In contrast with gold which is purely considered as an investment vehicle and hedge against economic recession and stock market volatility, silver is more volatile because of its industrial uses. So, every boom and bust cycle in the economy and stock market also affects the price of silver and makes it more volatile than gold.
Supply Side constraint on Silver
As the cost of mining silver is huge and similar to gold, mining companies do not find it profitable to increase the supply. Thus, the supply of silver is very limited. When the economy is performing well, the demand for silver is more and the limited supply puts upward pressure on the silver price. The opposite happens when the economy is not doing good. Thus, silver may not be a good hedge against economic recession and stock market volatility.
Risk of New Technology
There is always a risk that silver may be replaced as an industrial material by new technological development. This will adversely affect the silver’s price as 40% of silver’s demand comes from Industries.
No Regular Income
Silver does not offer any regular income as in the case of real estate, bonds, or equity which give rent, interest, or dividend as a regular income. In absence of such income, an investor has to wait for its price appreciation only.
Whether Silver is as good an investment as Gold?
Although silver and gold both are commodities, they are treated differently in terms of a store of value, a hedge against inflation, ornamental significance, etc.
Silver occupies more space to store
The same value of silver occupies more space than gold. Due to this, the cost of storage of silver is more. Thus, silver is not found as commonly stored precious metal as gold which affects its demand and price.
Silver is less costly than gold
As silver is less costly than gold, you can buy more silver than gold for the same investment value. This affordability makes it available for everyone due to which it offers more potential for future growth.
Silver is more volatile and illiquid than gold
As there are various factors responsible for silver’s price and silver is thinly traded than gold, silver’s price is more volatile than gold. There are times when silver’s price changes more than 10% on a single day. Silver is not as liquid as gold because gold still dominates the investors’ minds due to its inflation hedging quality and a hedge against recession.
Silver is a poor hedge against economic recession
The price of silver is affected by industrial demand to a larger extent than that of gold. Also, the gold’s price is affected by investors’ sentiment regarding the poor economic status or the stock market. Due to such qualities, silver is considered a poor hedge against economic recession in comparison with gold.
How to Invest in Silver?
You can invest in silver in physical form as well as in paper form.
Silver Investment in Physical Form
You can invest in silver in physical form by buying Silver Bullion, Silver Jewellery, or silver coins.
Silver Jewellery: As silver is less costly than gold, silver jewellery is used as a substitute for gold jewelry and also works as an investment option for the middle and lower-income class of the population. However, the silver jewelleries are not in pure form. Silver jewelleries can be purchased from various jewelleries shops located all around.
Silver Bullion: When you buy silver in bulk in bar form, it is called silver bullion. Silver bullion can be bought through commodity markets and government agencies such as MMTC corporation. Silver bullions are 99.5% pure silver.
Silver Coins: Silver coins are a very attractive and popular way of investment in silver by many middle-income families due to their small size which makes it easy to store. It can be purchased from various jewelry shops and even from various commercial banks. However, the silver coins cost more due to their making and marketing charges.
Silver Investment in Paper form
Until recently, the ways to invest in silver in paper form was through National Spot Exchanges, Commodity Futures through NCD, and NCDEX. However, after recent guidelines issued for Silver ETF and FOF by SEBI, an investor has the option to invest in silver through Exchange-traded funds and Fund of Fund schemes of various mutual fund houses.
E-Silver: E-Silver or digital silver can be bought through National Spot Exchange. An investor has an option to purchase in small amounts through their trading account maintained with a broker who is a member of the National Spot Exchange. NSEL also has an option to make the investment in physical form.
Commodity Futures: You can invest in silver through commodity futures in the commodity market. These commodity futures can be purchased through your broker who is a member of MCX and NCDEX. Here, the silver price is discovered through the market forces of demand and supply which are very frequent.
Silver Exchange Traded Fund (ETF) and FOF (Fund of Fund): After recent operating norms for silver ETF and FOF issued by SEBI, a number of Mutual fund companies such as ICICI Prudential Mutual Fund, Nippon India Mutual Fund, Aditya Birla Mutual Fund have filed for Silver ETF and Fund of Fund (FOF). An investor needs to purchase the units of an ETF through their brokers in stock exchanges. You can also purchase the Fund of Fund schemes of mutual funds which invest in these Exchange Traded Funds (ETF) of silver.
The Bottom Line
Although silver is not as perfect a hedge for inflation, recession as gold, it acts as a supplementary tool for diversification of the portfolio. Currently, silver seems under-owned and to some extent, undervalued. If you are a conservative investor, an investment in silver should be in a very limited part of your portfolio and you should have a very reasonable expectation while investing in silver. It should not be more than 5-10% combined with a gold investment in your portfolio. If you are already invested in gold to this extent, you may avoid the silver investment altogether. To invest in silver, an investor should utilize the latest investment tools such as Silver ETF and FOF which are professionally managed and more price efficient than physical silver.
