Kotak Mahindra Asset Management Company Ltd announced the launch of its open-ended silver exchange-traded fund (ETF) on November 10, 2022. The asset management company (AMC) in its fund offer document stated, “This fund will provide the investors an opportunity to hedge against the ongoing economic uncertainties and geopolitical risks prevalent across several major global economies.”
Nilesh Shah, Group President and Managing Director, Kotak Mahindra Asset Management Co. Ltd shared, “Silver provides the benefit of portfolio diversification to investors. Our ETF will provide a convenient option to investors for participation in silver as an asset class.”
The new fund offering will be open for subscription on November 21. Interested people can invest in this NFO till December 05 this year. There are no entry and exit loads to this fund, which means that investors can enter and exit this fund at their will and convenience.
Fund objective
The fund aims to earn returns based on the fluctuation in the domestic prices of silver. This means that the fund’s performance will directly depend on the performance of physical silver in the domestic environment though there is no guarantee that the fund will be able to achieve its objectives.
Apart, the fund will also trade in silver-related instruments. Additionally, the fund house will consider Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying silver-related instruments for silver ETFs.
As per the release from KMAMC, “Investing in silver ETFs is easier and safer than buying it in its physical form, providing easy liquidity and the flexibility to invest in smaller quantities. Furthermore, it offers lower transaction costs than physical silver while delivering the market equivalent price of the metal.”
Shah added, “Our Silver ETF launch is in line with our continued effort to provide easy and efficient access to various asset classes. It will provide convenient access to Silver as an asset which is not only a precious metal but also has many industrial uses. The consolidation in silver prices since the start of the year provides a good opportunity for those looking to allocate some money to this asset for diversification.”
Demand for silver on the rise
The World Silver Survey 2022 shares how the demand for silver surpassed its supply in 2021, with the demand going up by 19 per cent as opposed to the supply being up by only five per cent. To date in 2022, the demand for silver stands at 1,101.8 million ounces compared to 1030.30 million ounces of supply.
Silver prices depend on the demand for this metal. Details in the survey point to increasing demand for silver in the near future. The survey states, “Industrial demand for instance is expected to see initial gains as economies continue to recover from the pandemic and through structural change. A good example of that is the electrification of vehicles; both hybrids and even more so battery electric vehicles have higher silver loadings than internal combustion engine equivalents and so this shift will drive rapid silver demand growth. Jewellery demand is expected to see yet faster growth. Much will come from the recovery from COVID, in particular the lift to consumer sentiment, and our forecast of initially softer prices.”
Should you invest?
Blame it on unforeseen geopolitical tensions or anticipated market corrections due to high valuations, the stock market is on choppy waters now.
Dev Ashish, Founder, Stable Investor says, “If we look at the historical price trends, then silver is a lot more volatile than gold. Also, the demand-supply forces are quite different for both. But unlike gold, silver isn’t just a precious metal. It’s also an industrial base metal with uses across different industries. The general expectation is that in uncertain times, silver (like gold) will act as a hedge and a safe haven. But due to its industrial use cases, silver is also sensitive to the global economic cycle as well.”
When asked if it is worth including silver in one’s financial portfolio, Ashish adds, “Don’t be in a hurry to invest in silver ETFs just yet. If you have a small portfolio, get the basics like equity, debt, gold, etc. right first. Silver doesn’t exactly behave like gold. So talk to your investment advisor to understand whether you even need silver or not and if you do, then how much to allocate to it.”
“Precious metals should be part of an investor’s long-term portfolio. But the allocation should never be very high as these are portfolio diversifiers and shouldn’t be treated as core assets. A 5-15 per cent allocation can be considered but the exact allocation depends on each investor’s specific requirements and risk appetite. Let’s say if a 10 per cent allocation is to be made to precious metals, then between 7-10 per cent can be to gold and a smaller 0-3 per cent to silver. But if you know what you are getting into and understand the volatile nature of silver, then you may have a higher allocation to silver. It is perfectly fine for most small investors to skip investing in silver totally,” advises Ashish.
Fund investment
The fund units will be in the form of creation unit size or in multiples thereof. As per the company release, every creation unit contains 30,000 units of Kotak Silver ETF with one unit being roughly equal to one gram of silver.
Tax aspect
Most investors are keen to look into the taxation aspects of any investment before getting into it. The high tax slab rates coupled with very little opportunity to save on taxes through deductions and rebates add to their dilemma while parking their money in tax-saving instruments.
Ashish shares, “Capital gains from silver ETFs are treated as short-term if you sell within three years and long-term if after three years. The short-term gains are taxed as per investors’ income tax slab rate and long-term gains are taxed at 20 per cent after indexation.”
In the end, it all boils down to how much risk you are willing to take, your opinion on various investments and your understanding of how each opportunity will help achieve your financial goals in the long run.
