Silver ETFs betting rally will continue
Silver ETF in India have seen explosive growth. By the end of February 2025, the number of silver ETF had risen to 12 with monthly average asset under management (AUM) surging to Rs. 14,000 crores more than triple the 4,000 crores held by 11 EFTs a year earlier. What is a Silver ETF? A silver ETF is a type of mutual fund that tracks the price of physical silver and aims to replicate its performance. As with a typical mutual fund, this ETF also pools money from multiple investors and uses the funds to purchase silver of the highest fineness (999.0 parts or 99.9% purity). The physical silver that the fund purchases is stored in high-security vaults by custodian banks. Although a silver ETF is a type of mutual fund, it differs slightly from traditional funds. The units of the ETF are listed on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Interested investors can buy and sell units of silver ETFs like stocks through a trading account. By investing in a silver ETF, you can not only effectively gain exposure to silver without physically owning it but also avoid all the risks commonly associated with investing in the precious metal, such as safety and storage. How Do Silver ETFs Work? Silver ETFs mirror the price of physical silver. This essentially means that the value of the fund is directly linked to the price movements of the precious metal. For instance, if the price of silver declines, the value of the ETF will also go down. On the other hand, if the price of silver increases, the value of the ETF will rise. Each unit of a silver ETF represents 1 gram of the domestic price of silver. So, if the price of silver is ₹100 per gram, the ETF’s unit price will also be approximately ₹100 or slightly lower (after accounting for the expense ratio). Now, suppose you purchase 100 units of a silver ETF at ₹100 each by paying ₹10,000. In this case, you would essentially own 100 grams worth of silver. If the price of the precious metal rises to ₹150 per gram, the ETF’s value will also increase proportionately. At this point, you may choose to liquidate your holdings by selling the units on the exchanges at a profit of ₹5,000 (₹50 per unit x 100 units). Unlike equity or debt mutual funds, silver ETFs are passive investment options that require no active monitoring. Therefore, these funds usually have much lower expense ratios, making them highly cost-efficient investment options. Why such a rally for Silver? Silver is a crucial material for high growth industries It is the best conductor even better than aluminium, making it a key player in next generation industries The metal is critical to solar panels, electric vehicle batteries medical equipment and water purification technology Beyond its industrial uses, silver is gaining traction as a reserve asset. Unlike gold, primarily a monetary asset, silver has a dual identity as both a precious metal and an industrial commodity. That means its price is influence not just by macro-economic factors such as inflation and interest rates but also by shifts in base metal markets. With inflation risk falling global interest rates, and rising geopolitical tensions, both gold and silver remain key hedges. But silver’s strong industrial demand could give it an edge.