Best Silver ETF in India: How It Works and How to Invest

Silver has a significant role in the precious metals market in India, primarily due to demand for jewelry, investment, and industry. Investors looking to gain exposure to silver prices without holding physical metal may consider a silver ETF. But how do you determine the best silver ETF in India? The answer lies beyond recent performance. Investors should look into the scheme’s approach to investing and compare tracking error, expense ratio, liquidity, trading spreads, and other factors before taking a call.

Exploring ETF investments? Understand the available ETF options and how exchange-traded products work through ETF investment information before deciding whether a Silver ETF fits your requirements.

This guide explains how Silver ETFs work, what influences their prices, how to compare schemes available in India, and how to buy units through a Demat and trading account. It also explains the risks that beginners should understand before investing.

What is a Silver ETF?

A silver ETF is an exchange-traded mutual fund scheme, designed to offer returns that are in line with the domestic prices of silver, subject to tracking error. The scheme typically invests in silver of the prescribed purity, and may also hold permitted cash and other instruments for operational requirements.

An investor looking to hold silver can either purchase silver bars/coins or purchase units of a silver ETF. Unlike physical silver, which is cumbersome to buy and sell, ETF units are electronically held in a Demat account and can be easily bought and sold during trading hours of the stock exchange, subject to market liquidity and the scheme’s listing arrangements.

Silver ETFs are designed to follow price movements of silver; however, the returns may not be in line with price movements of silver. Differences may be attributed to expenses of the scheme, valuation, cash holdings, and other factors.

How does a Silver ETF work in India?

A Silver ETF is similar to other ETFs, whereby it pools money from investors to buy silver. A Silver ETF's Net Asset Value (NAV) is the per unit value of the silver held in the ETF. The market price at which a Silver ETF is traded on a stock exchange may differ from the NAV during a trading session.

Let's say the price of domestic silver goes up. As a result, the price of the silver held by the ETF may also increase. This could cause an increase in the ETF's NAV. However, the market price of the ETF is determined by many factors, including the demand and supply for the ETF on the stock exchange where it is traded. In addition, the market price of the ETF may differ from the indicative value of the silver held by the ETF if the trading volume is low.

Silver ETFs provide exposure to silver within a regulated mutual fund structure. As a result, investors do not have to organize storage for the metal physically. Investments in silver ETFs do not ensure a fixed return and are subject to price risks.

What influences Silver ETF prices?

• International silver prices: There are several determinants of international silver prices, including global investment and industrial demand for silver, supplies from silver mines, silver inventories, and other global economic conditions.

• Rupee-dollar exchange rate: Since international silver prices are quoted in USD, variations in the rupee-USD exchange rate can impact the cost of silver in India.

• Domestic market factors: Costs of silver imports, customs duties and taxes, and other domestic conditions can also impact silver prices in India.

• Fund expenses and tracking: Tracking error and expenses associated with the fund can lead to performance differences between the ETF and its benchmark.

• Exchange demand and liquidity: Prices of an ETF on a stock exchange are determined by demand and supply. Bid-ask spread also impacts the price.

How to identify the best Silver ETF in India

There is no best-performing ETF for all market conditions. An ETF that delivered the highest returns in a particular period may not have the lowest costs or the best liquidity. Comparing ETFs using standard measures and the latest information would be more beneficial.

1. Compare tracking error

Tracking error measures the variability of a scheme’s return in relation to its benchmark over a period of time. For Silver ETFs, it indicates how closely the fund followed the benchmark related to the price of silver. Lower tracking error indicates that the ETF tracked its benchmark closely, and though it doesn’t guarantee future performance, it is still useful information.

When comparing tracking error, ensure the measurement period is the same, and the scheme has a sufficiently long operating history. An ETF launched recently has a short operating history, and the data may not be directly comparable to an older ETF. The AMFI tracking error and tracking difference data provide more information to investors.

2. Check tracking difference

Tracking difference is the difference between the fund’s return and the benchmark return for a particular period. It indicates how much of the benchmark’s performance was delivered to the investor. Reviewing it for more than one period, e.g., since inception and 1-year return, would be beneficial. A scheme may have a low tracking error, but over time, have a negative tracking difference. Both measures should be taken into account.

3. Review the expense ratio

The Total Expense Ratio (TER) is the expense charged to a mutual fund scheme as a percentage of its assets. These expenses are factored in the scheme’s Net Asset Value (NAV). When comparing Silver ETFs, consider the latest TER rather than depending on an older fact sheet or an introductory figure.

All else being equal, a lower expense ratio can help reduce the ongoing cost of holding a scheme. However, a low-cost ETF could be illiquid or have wide bid-ask spreads, meaning it may not necessarily be cheaper to trade. AMFI explains the role of the mutual fund expense ratio and how it affects scheme NAV.

4. Examine AUM and trading liquidity

The term Assets Under Management (AUM) represents the size of a scheme. An ETF with a larger AUM may suggest an established investor base. However, larger AUM does not necessarily mean a scheme will have the best trading liquidity.

As far as Exchange-Traded Funds (ETFs) are concerned, take a look at average daily traded value/volume, bid-ask spread, and whether there are buyers/sellers available for the ETF. A narrow bid-ask spread means there is a smaller difference between the buying price and the selling price. However, during the trading session, spreads can vary.

Silver ETF comparison checklist

Use the following framework when comparing schemes. The figures should be collected from the latest AMC factsheets, exchange information, and official disclosures on the same date wherever possible. Also read the Scheme Information Document, benchmark, riskometer, and launch date.

For a current list of schemes and a starting point for comparison, see our Silver and Gold ETF comparison guide. Treat rankings and performance tables as time-specific snapshots, not permanent recommendations. Always verify current figures with the AMC before investing.

How to invest in a Silver ETF in India

Most retail investors buy listed Silver ETF units via a trading account connected to a Demat account. The process is like buying a share listed on a stock exchange. However, an ETF is a mutual fund scheme.

1. Open a Demat and trading account: Choose a registered intermediary and complete the account opening and KYC process. Check if your account is active for exchange-traded ETFs.

2. Research available Silver ETFs: Consider differences, tracking difference, TER, AUM, liquidity, and bid-ask spread. Don’t just pick a fund based on recent performance.

3. Find the correct ETF on your trading platform: Enter the exact ETF name or symbol. Check the AMC and fund details to avoid confusion.

4. Review the live market quote: Look at bid and ask prices, traded volume, and price movement. Refer to the available NAV or indicative value to compare with the market price.

5. Choose the order type and quantity: Enter the quantity of units to buy. A limit order gives you control over the price by letting you set a maximum price. A market order gives no control and is filled at the prevailing market price. This price can change due to liquidity.

6. Review charges and place the order: Take into account brokerage and any statutory or exchange charges shown by your broker. Verify order details and submit.

7. Check your Demat holdings: Once the order is settled, verify the units have been credited to your Demat account. Retain the contract note and transaction records for verification.

Want to understand ETFs? Review the available ETF investment options and information to know about the product category and account access generally used to trade listed ETF units.

Silver ETF vs physical silver: What is the difference?

Ownership and practical aspects differ between physical silver and a Silver ETF. Physical silver means holding the metal directly, while a Silver ETF provides a unit of a mutual fund scheme that aims to track the price of domestic silver.

• Storage: Physical silver requires safe storage and care. ETF units are held electronically in a Demat account.

• Purity and verification: Buyers of physical silver must consider purity and certification and the seller’s reputation. ETF investors verify the scheme’s portfolio and disclosures.

• Buying and selling: Physical silver is traded through dealers and other market participants. ETF units are traded on the exchange through the stock exchange during trading hours, subject to market liquidity.

• Costs: Physical silver holds costs of making, dealing, storage, and resale. ETF investors are to consider TER, brokerage, service tax, and bid-ask spreads.

To understand the exchange-traded structure and the role of NAV, read guide on how ETFs work in India.

Risks of investing in Silver ETFs

Investments in Silver ETFs are not capital protected. Investors in Silver ETFs can lose money if the price of Silver declines. Further, investors can incur losses if they sell their units of the ETFs at a price lower than their purchase price.

• Silver price volatility: Several factors can cause volatility in the price of Silver. These include industrial demand, global economic conditions and investor sentiment, and supply and demand conditions.

• Industrial demand risk: Silver is used in several industries. Thus, changes in manufacturing and technology can cause volatility in price.

• Currency and domestic pricing risk: The price of Silver in India is linked to changes in international prices, exchange rates, and market conditions.

• Tracking risk: Scheme expenses, cash holdings, valuation methods and trading conditions may cause returns to differ from the benchmark.

• Liquidity risk: The bid-ask spread of units of ETFs can increase, making it difficult for investors to buy or sell at the prevailing price.

• Concentration risk: Investing in Silver ETFs can affect the risk profile of a portfolio as the price of Silver can be negatively correlated with other assets (equity and fixed income).

Taxation and costs: What should investors check?

Silver ETFs are generally treated as non-equity mutual fund schemes for Indian tax purposes. The treatment is dependent on a number of factors, including the date of purchase, the holding period, and the tax rule in effect at that time. Verify the current tax treatment with the official tax authority or a tax professional before making a decision.

Apart from taxes, consider other costs such as the expense ratio, brokerage, exchange transaction fees, and any other fees shown by the broker. The price at which you buy or sell may be different from the NAV of the scheme, and these costs can impact the outcome.

Conclusion: How should you compare Silver ETFs?

The best Silver ETF in India is not necessarily the scheme with the highest recent return or largest AUM. A more disciplined comparison includes tracking error, tracking difference, TER, liquidity, bid-ask spread, scheme history, and quality of disclosures. Compare schemes after assessing product category-specific traits in detail. You can evaluate the ETF category through ETF investment category page.

Review the scheme documents and check the latest figures on a consistent date before placing an order.

Silver ETFs can be a convenient way to get exposure to movements in domestic silver prices in an exchange-traded way without the need to store the metal physically. However, you are still exposed to the volatility of the commodity markets and tracking differences. View this exposure in the context of your overall financial holdings and determine your risk profile before investing.

Readers looking for broader market education can check the share broker company in India and InvestEdge360 resources. This article is for general education and is not personalised investment advice.