Silver ETFs: Meaning, Working, Taxation & How to Invest
Introduction
There existed a time when exposure to silver often meant buying tangible silver assets such as bars, coins, and jewellery, which could entail storage issues, purity verification, and transaction expenses. Today, silver has evolved beyond tradition. It is now a strategic resource which aims to power the global economy at large.
In recent times, several market-linked avenues have emerged, enabling people to invest in silver through a regulated, exchange-traded format. Within the mutual fund framework, Silver ETFs (Silver Exchange Traded Funds) are one such avenue for obtaining silver exposure in a market-linked manner. This blog aims to explain what Silver ETFs are, how they work, and the taxation, risks, and considerations related to them, so investors can review them before investing.
What is a Silver ETF?
A Silver ETF is a mutual fund that has exposure to physical silver of 99.9% purity. It is listed, can be bought and sold on the stock exchange, and is stored in your demat account.
In simple terms, Silver ETFs allow you to obtain exposure to the precious/industrial metal instead of opting for traditional avenues like buying silver jewellery, coins, or bars.
Most importantly, the value of a Silver ETF moves in line with its benchmark, the domestic price of Silver, subject to expense ratio and tracking error.
How does a Silver ETF work?
Silver ETFs operate through a defined process within the mutual fund framework. The process of how silver ETFs work may be understood as follows:
Stage | What Happens | How It Connects to Silver |
|---|
1. Investor buys ETF units | The investor purchases silver ETF units on the stock exchange. It is stored in their demat account | Each unit is backed by an equivalent amount of physical silver |
2. Fund maintains silver holdings | A mutual fund holds physical silver corresponding to the issued ETF units | Units represent the underlying value of silver |
3. Silver stored with the custodian | The silver is stored safely in vaults with SEBI-registered custodians | Underlying asset is safeguarded |
4. Valuation of Silver | The market value of the underlying silver holdings is calculated | Forms the basis for calculating the scheme NAV (Net Asset Value) |
5. NAV reflects the silver price | NAV of the scheme is based on the domestic price of silver, subject to tracking errors[T | NAV moves in line with the domestic price of silver, subject to the expense ratio and tracking error |
*The Units of the Scheme can be bought/sold like any other stock on the stock exchange(s) on which these units are listed on all the trading days of the stock exchange. Alternatively, the Authorised Participants / Market Makers and Large Investors can directly buy/sell Units with the Fund in Creation Unit size. However, for large investors, the execution value shall be greater than Rs. 25 crore.
Thus, investors exploring how to invest in silver may consider participating in the price movements of silver through silver ETFs. This way, they may remain invested within the mutual fund regulatory framework without the need to handle the metal physically.
Key features of Silver ETFs:
Silver ETFs carry certain structural features arising from their mutual fund and exchange-traded fund structure. The key features are outlined below:
a. Market-linked silver exposure:
Silver ETFs are a regulated way to invest in silver, and they derive their value from the physical silver held by the scheme.
b. Dematerialised holding:
Silver ETFs are held electronically in a Demat account, similar to other exchange-traded securities.
c. Exchange-traded access:
Units of silver ETFs are listed on recognised stock exchanges and may be bought or sold during trading hours at market-determined prices.
d. Portfolio transparency:
As they are mutual fund schemes, silver ETFs disclose their holdings periodically (month-end) in accordance with regulatory requirements, including the details of silver held by the scheme.
e. Unit-based participation:
Investment is done through ETF units that represent the proportionate exposure to the scheme’s silver holdings.
f. Regulated commodity ETF framework:
Silver ETFs in India operate according to the regulations prescribed by SEBI for commodity-based exchange-traded funds and as per the SEBI Mutual Fund regulations.
How to invest in Silver ETFs:
Similar to other exchange-traded securities, investment in silver ETFs takes place through a stock exchange. The investment process is as follows:
a. Open a demat and trading account:
It is mandatory to have a demat and trading account with a registered intermediary before investing in silver ETFs, as the ETF units are held and transacted electronically.
b. Select a listed silver ETF:
Silver ETFs are listed on recognised stock exchanges in India. Investors may choose from the available schemes through their broker platform
c. Place a buy order on the exchange:
ETF units may be purchased during market hours by placing an order through the trading account, similar to purchasing listed securities.
d. Units credited to Demat account:
Once the transactions are executed on the exchange, the purchased silver ETF units are credited to the investor’s Demat account.
e. Sell units when required:
Investors may sell ETF units on the exchange at prevailing market prices, subject to market liquidity.
Taxation of Silver ETFs:
Returns from Silver ETFs may be subject to taxation depending on the holding period and applicable tax rules. As per the Income Tax Act, 1961, Silver ETFs are classified as capital assets. Therefore, gains from their sale are taxed under the capital gains provisions. The table below shows the current tax treatment applicable to Silver ETFs.
Holding period | Type of gain | Tax treatment |
|---|
Up to 12 months | Short-term capital gain (STCG) | Taxed as per the applicable income-tax slab |
More than 12 months | Long-term capital gain (LTCG) | Taxed at 12.5% (plus surcharge and cess), without indexation |
a. Silver ETFs are classified as non-equity (commodity) mutual funds, and hence do not qualify for equity-linked tax concessions.
b. The ₹1.25 lakh long-term capital gains exemption available to equity investments does not apply to Silver ETFs.
c. Indexation benefits that were earlier available to commodity funds are not applicable under the current capital gains framework.
Disclaimer: The tax rules may change, and investors may consider consulting a tax professional or checking the prevailing income tax provisions for applicability.
How to choose the right Silver ETF from the available ETFs on the exchange?
Before investing in a Silver ETF, investors may review the following aspects:
V – Average Daily Trading Volume
Generally, ETFs with higher trading volumes translate into greater liquidity and narrower bid-ask spreads, making it easier to execute larger transactions. Hence, one may choose an ETF with higher volumes.
IC – Impact cost
This refers to the cost attributable to the lack of market liquidity. Low liquidity can lead to wider bid-ask spreads, increasing the cost for buyers and sellers. ETFs with higher liquidity typically might have lower impact costs.
T - Tracking Error
ETF fund managers regularly track the tracking error and aim to keep it as low as possible. A low tracking error means the ETF returns are more closely aligned with the index returns, making it important to invest in an ETF with a low tracking error.
ER – Expense ratio
The expense ratio is deducted from the ETF’s NAV. A higher expense ratio may lead to a higher difference in the returns between the ETF and the underlying index. Therefore, it is generally better to invest in ETFs with a lower expense ratio. However, this parameter must be evaluated alongside the other three to ensure a holistic approach.
Conclusion:
Silver ETFs provide a regulated, market-linked way to obtain exposure to silver through mutual fund and stock exchange frameworks. Silver ETFs link physical silver to the financial markets by offering units that can be bought and sold on the exchange, while a regulated fund structure holds the underlying silver. Like other commodity investments, the role silver ETFs play in a portfolio can differ across investors, depending on their asset allocation, time horizon and prevailing market conditions. Investors may therefore assess their investment purpose and suitability before participating in Silver ETFs.
FAQs:
1. Is it better to buy silver or a Silver ETF?
Physical silver and silver ETF units represent different forms of exposure to silver. While physical silver involves storage and making charges, silver ETFs provide exchange-traded electronic units backed by physical silver holdings in a secure vault with SEBI registered custodian. Each form has distinct characteristics, costs and usage aspects. Investors may evaluate which form aligns with their requirements and constraints and then invest accordingly.
2. Can I sell silver ETFs anytime?
Yes, units of a listed silver ETF scheme may generally be bought or sold on the stock exchange during market trading hours, similar to shares, subject to market liquidity. Settlement and credit of the sale proceeds occur in accordance with the exchange timelines.
3. Is Silver ETF taxable in India?
Yes, gains from a silver ETF in India are taxable. If units are sold within 12 months, gains may be taxed at the investor’s applicable income-tax slab rate. If held for more than 12 months, gains may be taxed at 12.5% (plus surcharge and cess), without indexation. Tax rules may change and depend on individual circumstances.
4. Is it safe to invest in a Silver ETF?
Silver ETFs operate within the mutual fund regulatory framework and hold physical silver with SEBI-registered custodians in a secure vault. Their unit prices are market-linked and may fluctuate with silver prices and market dynamics.
