Silver lining to your portfolio: Pros and cons of investing in this precious metal

UTI Mutual Fund recently came out with two new fund offers (NFOs) involving investment in silver. One offer is regarding the UTI Silver Exchange Traded Fund while inclined investors may consider putting their money in the UTI Silver ETF Fund of Fund too.

Simmering geopolitical tensions have caused many people to think of alternative investment options beyond equities, debt and real estate. Many investors are warming up to the idea of putting their money in silver considering how the price of this rare metal has continued to grow over the years.

In a recent report citing currency impact on silver prices, NS Ramaswamy. Head CRM & Commodities, Ventura Securities shared, “Dollar index movement is crucial. Its trend is based on the rate hike decision. Silver gains from a weaker dollar. The USDINR also plays an important role in the MCX Silver conversion. The USDINR by 2023 is likely to range 81 with a forecast of 79.50 for mid-2024.”

Though the report does not explicitly explain the possible movement in silver prices, a weakening dollar compared to the rupee hints at the probability of a rise in silver prices.

Should you add silver to your portfolio?

“Does it make sense to invest in silver?” is a question that is often asked in the wake of market volatility and flickering stock prices. Debt fund instruments, especially target maturity funds (TMFs) are the new favourite though many people rue on the not-so-great returns promised in these funds. With gold and silver prices on the rise, many investors are shifting their focus to exchange-traded funds (ETFs) and mutual funds including silver in their portfolios.

Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) said, “While there is a case for having some allocation to precious metals, the allocation should be limited to 5-15 per cent and never be very high as these are portfolio diversifiers and not core assets. Of this, given that gold is a true hedge against uncertainties compared to silver, the major allocation should be to gold and not silver. The reason is that gold is much better insulated during economic slowdowns as silver is also used in industries and is linked to the economic cycle.”

Ashish explained, “Let’s say if 10 per cent allocation is to be made to precious metals, then between seven and 10 per cent money can be to gold and a smaller 0-3 per cent to silver. But if an investor is aware of silver and its price-demand dynamics, then they may go for a higher allocation to silver. And if an investor has a comparatively small portfolio, then it’s better to focus on getting the basics right on the allocation of equity-debt instead of trivial ones like whether to invest some amount in silver or not.”

Lallit Tripathi, Chairman and Managing Director, Vedant Asset said, "India is a great market for silver, accounting for nearly 90 per cent of the world's silver mine production in 2022. As an asset class, silver is ok for consumption, and holding it in digital form is much better, but when compared to other asset classes as an investment, like equity, the other has produced better returns over the long term than silver.”

How much allocation should one opt for?

Simply investing in silver may not be enough. Investors must be aware of how much they wish to invest in silver via ETFs or mutual funds. Most importantly, they must decide if they want to invest regularly or sporadically in lump sum amounts.

When asked about the ideal allocation (in percentage) must one allocate to silver while deciding on investments, Viral Bhatt, Founder, Money Mantra said, “I recommend that investors diversify their portfolios across various asset classes, including mutual funds, stocks, bonds, and alternative investments such as commodities, including precious metals like silver. A common recommendation is to allocate a small percentage, perhaps around 5-10 per cent of a portfolio to silver or other precious metals. However, the actual allocation should depend on individual circumstances and investment objectives.”

Tripathi added, “Investors wishing to invest in the same must limit their holdings to not more than five per cent of their overall portfolio.”

Invest in silver for diversification

Not all investment options may be worth considering. For example, investors yearning to benefit from fluctuations in silver prices and consequently a rise in them often decide to allocate a percentage of their money in ETFs or mutual funds with portfolios in silver.

Basavaraj Tonagatti, a Certified Financial Planner, SEBI Registered Investment Adviser and a Finance Blogger at BasuNivesh said, “We must first contrast the volatility of silver with that of gold. A century’s worth of history reveals that it is a much more volatile metal than gold. Investors without any experience should entirely avoid this product. Therefore, I highly advise against investing in either silver ETFs or Fund of Funds (FOFs). However, if a person is comfortable tracking price changes, they can trade in ETFs. But keep in mind that the trade volume can be lower than expected, making liquidity a problem right now.”

Rishabh Parakh, Chief Play Officer, NRP Capitals said, “Investors are cautious and fearful in the markets about possible further corrections in the market under inflationary pressure and the overall slowdown in the global economy, but that gives you a better chance to put more money in equities in multiple tranches and not in one go. However, the fear of equities must not translate to investing in silver. You must invest in silver or gold as an element of diversification. However, such investments must not exceed 5-10 per cent of your overall net worth. Also, it is important that you invest in silver ETFs in an organized way.”

Which investment vehicle serves best?

UTI Mutual Fund recently launched investments in silver through ETFs and mutual funds. Should one invest in any of these funds?

To this, Parakh answered, “Buying silver through ETFs is a good way. However, it would help if you considered this only when it is a part of your risk profile, and you have adequate exposure to equities, or your gold or commodity investments may not be up to the mark. Only allocate to silver based on your financial planning and not out of fear of falling markets. Corrections in the market are more of an opportunity for the market to invest in equities as Warren Buffett kept stressing on the need to be greedy when others are fearful.”

Vasudha Gupta, Finance Lead, CommsCredible explained, “Silver investments are one of the oldest forms of investments and are considered as an alternative to gold. Silver ETFs and mutual funds also offer a convenient and cost-effective way without worrying about storage and security concerns. Still, there are certain factors which need to be kept in mind while taking any investment decision like the fund's management fee, liquidity, historical performance, term and risk tolerance level of investors.”

When asked about the factors one must keep in mind while deciding to allocate money to this fund, Tanvi Goyal, Founder, Wealth Aware shared, “I recommend investors to create their major portfolio based on asset allocation rather than make tactical decisions. As per the asset allocation strategy, investors have to earmark a percentage to one asset class."

Goyal added, "For instance, if an investor decides to keep 60 per cent in equity, 20 per cent in debt and the remaining 20 per cent in precious metals (of course after understanding their risk profile), then when the price of any asset is down, they can add more to the basket. As per this strategy, the investors need not fear the downturn in the equity markets over the long term. As far as silver is concerned, it will always be attractive to Indian investors, however, gold should always be given precedence, as silver has a higher variance, and the returns are not higher than those of gold if we consider a long period. In the olden days, it was difficult to purchase gold in smaller quantities so many people had to make do with silver. However, that is not the case anymore.”

The glaze of silver is attracting many though experts are still unsure of investing in this metal owing to great fluctuations in its prices. Investing in such rare metals or commodities is a good thing though investors must be aware of why they are investing, to what extent they wish to invest and the tenure for which they wish to stay invested.