Why should you consider silver ETFs to enhance your investment portfolio?

Silver holds an important place in the Indian cultural fabric, celebrated on important occasions and valued as a symbol of prosperity. In addition to its traditional uses, silver plays a key role in various industries, including automotive, telecommunications and renewable energy. As an investment channel, silver exchange-traded funds (ETFs) offer investors a convenient and efficient way to leverage the potential of this precious metal.

The importance of silver in modern manufacturing processes cannot be overstated. Its versatility extends to automotive manufacturing, where it is used in electrical components and catalytic converters. In telecommunications, it plays a key role in the production of high-quality devices through applications such as silver-coated mirrors and conductive ink.

In addition, silver’s conductivity and durability make it an ideal material for solar panels, supporting the global transition to renewable energy sources. With the continued development of renewable energy sources and technologies, industrial demand for silver is expected to skyrocket, further cementing its status as a valuable commodity.

Silver demand continues to grow, driven by industrial applications and investment demand. However, limited silver supply, coupled with challenges in mining and refining, creates supply constraints. The delicate balance between supply and demand dynamics influences silver prices, making it an attractive investment option for experienced investors.

Although silver is mined worldwide, its scarcity relative to demand contributes to its attractiveness as an investment. In addition, silver’s dual role as a precious metal and an industrial raw material increases its investment resilience, offering a hedge against inflation and economic uncertainty.

According to the Silver Institute’s World Silver Survey, industrial demand for silver has surged to a new peak of 18,663 metric tons (MT) in 2023. Looking ahead, the institute is forecasting a 2 percent increase in total silver demand in 2024, with industrial production set to reach another record high.

In addition, global silver production fell slightly by 1 percent in 2023, with a marginal decline of 0.8 percent forecast. Overall, the silver market is forecast to post another significant deficit in 2024, at 6,688 MT, the second-highest deficit in over 20 years.

Why invest in silver ETFs?

Investing in silver ETFs offers investors numerous benefits. First, they provide a convenient alternative to owning physical silver, eliminating the need for storage and maintenance. Additionally, investors do not incur any storage costs with silver ETFs, as the silver holdings are held in dematerialized form. It then closely tracks the price of silver, allowing investors to benefit from its price fluctuations and potential growth.

Moreover, these ETFs usually have a low expense ratio, which ensures cost-effective investment management. Investors without a demat account can consider investing in Silver ETF Fund of Fund (FoF).

In addition, silver ETFs invest in high-purity silver, providing transparency and authenticity to the underlying asset. They also have the potential to generate returns that exceed inflation, protecting investors’ purchasing power. In addition, silver ETFs are highly liquid, allowing investors to easily buy and sell units on exchanges during market hours. Above all, they increase portfolio diversification, mitigating risk and optimizing risk-adjusted returns.

In terms of tax implications, starting April 1, 2023, income earned on silver ETFs is taxed at the investor’s income tax rate. This tax treatment aligns silver ETFs with other non-equity mutual funds, ensuring uniformity of taxation across all investment channels.

In conclusion, silver ETFs offer investors an attractive opportunity to shine in their portfolios, taking advantage of the potential of this precious metal due to the supply and demand dynamics. With its diverse industrial applications, limited supply, and strong investment demand, silver is an interesting investment avenue for those looking to diversify their portfolio and protect themselves from market uncertainty.

As with any other investment, investors should conduct thorough research and consult with their financial advisor to make an informed decision tailored to their own investment objectives and risk tolerance.

Chintan Haria, Director, Investment Strategy, ICICI Prudential AMC.