HDFC Silver ETF: Is It the Ideal Time to Add Silver to Your Portfolio?

Aug 25, 2022

Listen to HDFC Silver ETF: Is It the Ideal Time to Add Silver to Your Portfolio?

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Silver as a commodity plays a dual role as a precious metal as well as an industrial metal and gets adequate attention in the global commodities market, ensuring liquidity. The demand for silver is anticipated to increase as green technology, such as electric vehicles, mobility, energy generation, and telecom, receives more attention. Due to the higher adoption of new age and green technologies, the outlook for silver is positive. Along with the above, Silver is also a precious metal which hedges against currency depreciation since it is globally priced.

A surge in EV demand in automobiles and the full-fledged launch of 5G networks are expected to drive up silver prices significantly. Many investors consider this precious metal to be a profitable option to invest in the commodities market. You may diversify your portfolio and create an all-weather portfolio with one source of profitability even if all of your other investments are sailing through rough seas by integrating commodities as an asset class. You can designate a modest amount of your portfolio to silver depending on your long-term investment objectives.

An individual may find it challenging to invest in physical silver and store it securely, therefore investors may consider investing in mutual funds that replicate the performance of silver. It has been pouring silver ETFs since SEBI announced operating norms for the introduction of silver ETFs in November 2021. Investment in Silver ETF is a digital way to invest in silver, eliminating the need to store Silver physically.

HDFC Mutual Fund has launched HDFC Silver ETF, it is an open-ended Exchange Traded Fund replicating/tracking the performance of Silver. The scheme offers an opportunity for the investors to digitally invest and own silver which is easily tradable during market hours and diversifies one's portfolio at a low cost.

On the launch of this fund, Mr Navneet Munot, Managing Director and Chief Executive Officer at HDFC Asset Management Ltd. said, "HDFC AMC has always maintained an investor-first approach offering our clients the most effective solutions while launching products. This Fund will provide investors with an opportunity to enhance portfolio diversification by investing in metal with a differentiated risk-return profile."

Table 1: Details for HDFC Silver ETF

Type An open-ended Exchange Traded Fund replicating/tracking the performance 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 is no assurance that the investment objective of the Scheme will be realized.
Min. Investment Rs 500/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Bhagyesh Kagalkar Benchmark Index Domestic Price of Physical Silver (based on London Bullion Market Association (LBMA) Silver daily spot fixing price.)
Issue Opens: August 18, 2022 Issue Closes: August 26, 2022
(Source: Scheme Information Document)
 

The investment strategy for HDFC Silver ETF will be as follows:

HDFC Silver ETF will be managed passively with investments in physical silver of prescribed quantity and quality (fineness) and endeavour to track the spot price of silver as derived from the LBMA (London Bullion Market Association) AM fixing prices. As per the SEBI rules, all Silver ETFs must hold silver having 99.9% purity.

HDFC Silver ETF: Is It the Ideal Time to Add Silver to Your Portfolio?
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The scheme will track its underlying index and endeavour to achieve the scheme's investment objective. The AMC does not make any judgments about the investment merit of underlying assets nor will it attempt to apply any economic, financial or market analysis. Since the scheme is an exchange-traded fund, the scheme will only invest in silver & silver-related securities constituting the underlying index. The expectation is that, over time, the tracking error of the scheme relative to the performance of the underlying Index will be relatively low.

Investment in Debt securities and money market instruments will be as per the limits in the asset allocation table of the Scheme, subject to permissible limits laid under SEBI (MF) Regulations. Investment in debt securities will be guided by credit quality, liquidity, interest rates and their outlook. The Scheme may also invest in the debt schemes of Mutual Funds.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for HDFC Silver ETF

Instruments Indicative Allocations (% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Silver and Silver Related Instruments# 95 100 Very High
Debt Securities & Money Market Instruments & units of debt schemes of mutual funds 0 5 Low to Medium
#Includes physical silver and other silver-related instruments which may be permitted by Regulator from time to time. Exchange Traded Commodity Derivatives (ETCDs) having silver as the underlying shall be considered as 'silver related instrument'.
(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 HDFC Silver ETF?

The designated fund manager for this scheme is Mr Bhagyesh Kagalkar. He holds a B.E. (Production) and MMS (Finance) degree and has over 28 years of experience in Equity Research, investments and Finance. At HDFC Mutual Fund, Mr Kagalkar currently manages, HDFC Gold Exchange Traded Fund, HDFC Multi-Asset Fund (Gold Assets) and HDFC Asset Allocator Fund of Funds (Gold ETF Schemes). This scheme will be co-managed by Mr Krishan Kumar Daga.

 

Fund Outlook - HDFC Silver ETF

HDFC Silver ETF aims to invest in physical silver and silver-related instruments and it is a smart way to own silver with 99.9% purity in an easy digital form. The scheme seeks to generate returns that are in line with the performance of physical silver in domestic prices as derived from the LBMA (London Bullion Market Association), subject to tracking error.

Silver demand is roughly split 50% between industrial applications and jewellery. Silver is widely used in a large variety of specialised equipment, such as the upcoming 5G technology ecosystem, solar panels, satellites, electric vehicles, etc. Silver is a key component used in many industries, including electronics, automotive, electrical, pharmaceuticals, etc. Given that silver is a necessary basic commodity, demand may rise as the world moves toward more sustainable & renewable energy sources.

Silver can be a good diversifier for your portfolio in commodity as an asset class and in volatile times since commodity price movements have a low correlation with equities. In comparison to purchasing physical silver, the scheme offers investors a better alternative because it has higher liquidity and lower storage costs. Being a globally priced metal, it acts as a hedge against currency depreciation.

However, do note that silver is more volatile in nature than gold since it is an industrial metal. Gold has traditionally been driven by safe-haven demand, whereas silver has been driven by industrial demand. Additionally, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI's recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and keep the commodity market volatile in the near term. However, rising industrial demand may work in favour of silver prices.

Thus, HDFC Silver ETF is a high-risk strategy and suitable for experienced investors who understand precious metals or commodities cycles. Ensure you have a high-risk appetite, a long investment horizon to benefit from the future potential of silver and your investment objectives align with the fund.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst



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