Commodities can act as a hedge against inflation as their prices are intricately linked to general pricing levels in the economy. The commodity market includes investments in precious metals such as gold and silver, apart from grains, oil, natural gas, etc. Indian investors know that commodities provide diversification to a portfolio as their price movements are less correlated to equities.

Recently, investors seeking to invest in commodities in precious metals through mutual funds have an option to invest only in Gold in the form of an ETF. As you are aware, Gold ETFs started slow and later picked up the pace in the market. Until now, Silver, as an investment option, was only available to hold in physical form or trade in Silver future contracts.

The Securities Exchange Board of India (SEBI) during its board meeting held in September, 2021 announced the launch of Silver Exchange Traded Funds (ETFs), allowing domestic mutual fund houses to launch schemes that will track domestic prices of silver. In November 2021,the SEBI introduced operating norms for Silver ETFs that mandates the scheme has to hold at least 95% of its assets in silver and silver-related instruments. The introduction of Silver ETFs is a positive development for retail investors seeking to gain exposure to silver as an asset class. Furthermore, Silver ETFs are similar to Gold ETFs; many investors have asked for a convenient way to invest in silver since a long time.

Given that, the operating norms presented by the SEBI came into effect from December 09, 2021 and many fund houses such as, HDFC Mutual Fund, Nippon India Mutual Fund, Mirae Asset Investment Managers, Aditya Birla Sun Life Asset Management Company, and DSP Mutual Fund have applied for Silver ETFs with SEBI.

ICICI Prudential Mutual Fund has rolled out India’s first Silver ETF called ICICI Prudential Silver ETF. It is an open-ended scheme replicating/tracking Domestic Price of Silver.

On the launch of this fund, Mr Chintan Haria, Head Product and Strategy at ICICI Prudential Mutual Fund said, “We believe silver ETF will be one of the preferred ways for investors to take exposure to silver as one need not worry about the bulky nature of silver, purity, quality or liquidity of the investment. Silver is among the preferred option globally when it comes to investing in precious metals. This is because silver is considered as a store of value, hedge against inflation and has very limited co-relation with other asset classes.”

Table 1: Details of ICICI Prudential Silver ETF

Type An open-ended scheme replicating/tracking Domestic Price of Silver. Category Exchange Traded Fund
Investment Objective The Investment objective of the scheme is to generate returns that are in line with the performance of physical silver in domestic prices, subject to tracking error. There can be no assurance or guarantee that the investment objective of the plan will be achieved.
Min. Investment Rs1000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Gaurav Chikane Benchmark Index Domestic price of silver as derived from the LBMA AM fixing prices.
Issue Opens: January 5, 2022 Issue Closes: January 19, 2022

(Source: Scheme Information Document)  

The investment strategy for ICICI Prudential Silver ETF is as follows:

ICICI Prudential Silver ETF will track the domestic prices of silver as derived from the LBMA (London Bullion Market Association) AM fixing pricesand invests in physical silver and silver related instruments.As per the SEBI rules, all Silver ETFs must hold silver having 99.9% purity.

The scheme will invest at least 95% of its total assets in silver or silver-related instruments i.e. Exchange Traded Commodity Derivatives (ETCDs) that have silver as underlying asset. The exposure to silver ETCDs will not exceed 10% of the net asset value (NAV) of the scheme. It may hold up to 5% of their total assets in debt or money market securities. Expectation is that, over time, the tracking error of the scheme relative to the performance of the underlying Index will be relatively low.

The designated Fund Manager, under the supervision of the Chief Investment Officer, will take all investment decisions. The Fund Manager will monitor the tracking error of the scheme on an ongoing basis and seek to minimize it. There is no assurance or guarantee that the scheme will achieve any particular level of tracking error relative to the performance of its benchmark Index.

Any other strategy will be notified by the regulators from time to time. Under normal circumstances, the asset allocation will be as follows:

Table 2: Asset Allocation for ICICI Prudential Silver ETF

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Silver and Silver related instruments with Silver as Underlying# (Refer note below) 95 100 Medium
Debt & Money Market Instruments including units of Debt oriented Mutual Funds 0 5 Low to Medium

#The Scheme may also participate in Exchange Traded Commodity Derivatives (ETCDs) with Silver as underlying to the extent of 10% of net asset value of the scheme. However, the above limit of 10% shall not be applicable to Silver ETFs where the intention is to take delivery of the physical silver and not to roll over its position to next contract cycle. Such investments shall be made in line with the SEBI regulations as may be specified by SEBI from time to time, subject to prior approval from SEBI, if any.

(Source: Scheme Information Document)  

About LBMA (London Bullion Market Association)

The London Bullion Market Association is the international trade association representing the global OTC (Over the Counter) bullion market for precious metals such as gold and silver. LBMA is associated with miners, investors, fabricators, ETFs, refiners, manufacturers, consumers, and central banks from around the world. It serves as a point of contact for regulators, investors, and clients, and, most importantly, it is the voice of the global precious metals market.

Who will manage ICICI Prudential Silver ETF?

Mr Gaurav Chikane will be the dedicated fund manager for this scheme.

Mr Gaurav Chikane holds MBA (Finance) and B.E (IT) degree and has overall 8 years of experience in Commodity Derivatives. Prior to joining ICICI Pru AMC, he was associated with Inditrade Business Consultants Limited – Commodities, Edelweiss Commodities Trading Limited – Commodities, and Accenture Services Private Limited – IT.

At ICICI Pru AMC, Mr Chikane currently manages ICICI Prudential Multi – Asset Fund and ICICI Prudential Gold ETF

Fund Outlook – ICICI Prudential Silver ETF

ICICI Prudential Silver ETF aims to provide returns that closely correspond with the performance of physical silver in domestic prices as derived from the LBMA (London Bullion Market Association) AM fixing prices, subject to tracking errors.

The scheme offers investors a better alternative to benefit from appreciation in prices of silver compared to physical silver because it provides higher liquidity and less storage costs. Silver is widely used in specialist electronics because it is an excellent conductor of electricity, even better than copper. It is widely used in the new 5G technology ecosystem to make various technical parts, solar panels, medical instruments, switches, satellites, electric vehicles, etc.

The industrial use of silver is increasing swiftly, however the supply of silver fluctuates in tandem with the demand for other resources such as, copper, gold, and zinc which is influenced by the industrial manufacturing outlook.

The history of silver prices illustrates that the commodity appreciates in value as inflation rises. It provides a hedge to investors against inflation; it has a low correlation with other asset classes and can protect against loss in purchasing power.

Though silver is seen as a low-cost replacement for gold, it is important to note that silver is highly volatile in nature as compared to gold. In case of an unforeseeable event, the probability of its impact on prices of silver is higher than that of gold prices.

The emergence of the new omicron variant and rise in cases as well as the US Federal Reserve’s plans of tightening their monetary policy are expected to keep the commodity market volatile. However, rising industrial demand can work in favour of silver prices.

Thus, this scheme is suitable for investors with a moderately high risk appetite, long investment horizon to benefit from future potential of silver. Before you invest, ensure your investment objectives are aligned with the mutual fund scheme.

This article first appeared on PersonalFN here

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