Mutual funds going crazy after silver. Should you invest?

Mutual funds are ready to flood the market with silver exchange traded funds (ETFs) and silver fund-of-funds (FoFs) next week. ICICI Prudential Mutual Fund, which launched the country’s first ETF earlier this week, will launch a FoF scheme to invest in it’s silver ETF. Nippon India Mutual Fund and Aditya Birla Sun Life are all set to launch both ETF and FOF options to invest in the white metal. All the three issues will open for subscription on January 13. Should you invest? As per experts, silver is not everyone’s cup of tea.

An ETF tracks an index, commodity or a sector which can be traded on a stock exchange just like shares. A fund-of-fund invests in some other mutual funds. In case of silver FoFs, these will invest in silver ETFs.

Can silver replace gold?

Indian investors have always gone for gold as a hedge against downturns in equities but silver gained wider traction during the pandemic as it outperformed gold by 12 percentage points, with over 46% returns in FY 2020-21. Does that mean silver can replace gold as a hedge against economic lows?

Not exactly. Silver is a highly cyclical product and is more volatile than gold. Silver performs well in selective pockets and is an inconsistent performer. Thus, catching the right entry and exit price is very important. Rushabh Desai, founder, Rupee With Rushabh Investment Services says that silver has a high correlation with gold and low correlation with equities. So, he opines, one can expect silver prices to move more or less in the same direction as gold, But when compared with gold, "silver has been more correlated to equities than gold."

"Industrial demand for silver is huge and around 50% of silver mined globally is used in industrial applications and products. Thus, unlike gold which is considered as a pure hedge product, the prices of silver can get affected during economic crises, slowdowns and market falls especially when the industrial demand for silver is low or muted," adds Desai.

Chirag Mehta, senior fund manager, Quantum Asset Management says that while silver prices tend to move in tandem with equities, gold, in contrast, gets a leg-up during economic distress. Thus, silver cannot be used to hedge against economic uncertainties.

Hedge against inflation?

As per historical data, in a very long term period, the lustrous white metal has offered inflation-beating returns. “If you see the performance of silver over a long term of almost 31 years starting Jan 1990 till Dec 2021, it has given a return of almost 9.70% CAGR in INR terms, similar to gold, which is above inflation levels," says Hemen Bhatia, head, ETF, Nippon Life India Asset Management.

But if we look at a 10-year period, which is fairly a long time frame, silver has generated close to 2% CAGR returns, way down to beat inflation.

Silver investment for huge returns?

Investors looking at trading in silver or expecting extraordinary returns from investments, says Raghvendra Nath, MD of Ladderup Wealth Management, may not like the idea of investment in ETF. “Returns from investing in silver ETF will be inline with the returns from investing in silver bars, minus the fees and the tracking error.”

A tactical bet

Silver investment is meant for investors who have surplus or play around money and who are able to take tactical bets. Investors who do not understand the price momentum of silver and its market should strictly avoid this product.

“Silver needs to be considered as a tactical investment and not a strategic investment. This product needs to be a part of one’s satellite portfolio and not the core portfolio with a maximum allocation up to 5%,” says Desai.

Investing in silver is expected to reap better benefits than gold during recovery times. “Silver usually outperforms gold during economic recovery cycles in the longer run such as post-pandemic,” says Kashyap Mahavadi, founder, CEO, Dinero, Neobank. So, Silver ETFs are suitable for savvy and elite investors those, who are looking for diversification outside of stock markets, and if one can stick around for medium to long term.

Currently, the white metal is down by ₹17,000 from its all-time high price of around ₹78,000 per kg in August 2020.