It’s that time of the year when individuals buy gold and silver. Now there is enough awareness about paper form of gold and silver over physical form unless one is buying them purely for the consumption purpose. One such paper form is exchange traded funds (ETFs). While standalone gold ETFs have been in vogue for a long time. Silver ETFs are a recent innovation.
Market regulator Sebi allowed Indian asset management companies to launch silver ETFs in November 2021. A lot of AMCs have already done it. The innovation doesn’t stop here. There are ETFs that combine gold and silver in one product.
Gold and Silver ETFs
Edelweiss Asset Management Company in August 2022 launched India’s first Gold and Silver ETF Fund of Fund which mixes gold and silver ETFs in equal allocation and maintains it via periodic rebalancing. The subscription to its NFO ended on September 7.
Soon after Motilal Oswal AMC on September 26 launched Gold and Silver ETFs Fund of Funds (FoF). The NFO closed on October 7.
Is the combined product better than standalone ETFs, FoFs? Not necessarily. The prices of gold and silver do move in tandem most of the time but silver prices are much more volatile. Sometimes they may take a different direction. This is because silver is not only a precious metal but is also a base metal for industry use. This links it to the global economic scenario. That said, gold ETFs work better as a hedge over silver ETFs when the economy is on a downtrend.
The data corroborates the view. A report from Incrementum AG, a Liechtenstein-based portfolio management company, shows gold has returned 11.7 percent return over the last decade between 2002 and 2022 as on September 30 in rupee terms. The returns for silver in rupee terms stood at 11 per cent. Looking into YTD returns in 2022, the silver prices are down nearly 11 per cent while gold prices are flat.
Lately gold and silver prices have fallen due to a rise in the dollar index after the US Federal Reserve raised interest rates in the US several times. “Gold and Silver have been on a decline in recent times, however depreciating rupee has restricted the decline for ETFs. Investors should have some exposure to bullion as a hedge towards value depreciation of paper currency. Also, Gold ETFs are attractive avenues since real interest rates are still negative in most places globally,” says Vinit Pagaria - Head - Data and Research, StockEdge.
That said, gold and silver ETFs are indeed better than having them in the physical form, but between the two, gold ETFs are preferable.
Moreover, when it comes to gold, one doesn’t have to stick to ETFs. There are sovereign gold bonds that are even better as an option to take exposure in paper forms of gold. “With a diversification point of view, gold is the precious metal retail investors should look at. We do not believe exposure to silver is required by retail investors. Gold is enough. Sovereign Gold Bonds are the best vehicle to take exposure in gold. Every exposure need not be through mutual funds including ETFs,” says Niraj Dugar - Chief Goal Planner - Holistic Prime Wealth.
The two tranches of gold bonds have already been issued in the financial year 2022-23. The dates for the third tranche are yet to be disclosed. Meanwhile, one can buy gold bonds from the secondary market.
So, don’t buy a product just because it exists. “AMCs have launched silver ETFs to enhance their product portfolio basket because SEBI has recently allowed it. Investors (especially retail) should focus on four asset classes only - Fixed Income, Equity, Gold and Real Estate for their personal finance management,” Dugar adds.
If you still want to experiment, keep about a 5 percent allocation to standalone silver ETFs or in a combination of gold and silver ETFs.
Aprajita Sharma is a freelance journalist and a certified financial planner. She can be reached at @apri_sharma on Twitter and LinkedIn.