Mutual funds pitch silver ETFs amid volatile equities; up 30% in last one year

As equity markets continue to experience heightened volatility, investors appear to be turning towards commodities like gold and silver as alternative investment options. The recent launch of silver exchange-traded funds (ETFs) by Zerodha and 360 One could further fuel interest in silver as a potential wealth-building asset.

Historically, silver and gold prices tend to move in tandem, though silver’s greater industrial usage makes it more volatile, said experts. Global uncertainties, including fluctuating interest rates and geopolitical risks, could be factors supporting silver investment, they add.

Manav Modi, Senior Analyst, Commodity Research, MOFSL, highlighted the fact that silver ETFs have been available in India for over a year-and-a-half with AUM of around Rs 10,000 crore, bridging the gap for investors who previously had limited options beyond physical silver and exchange-traded products.

“Silver prices have seen substantial gains, rising over 20% last year and approximately 10-12% this year, closely following gold’s performance,” said Modi.

“Key drivers include gold’s market trends, strong industrial demand (which accounts for over 50% of silver’s usage) China’s economic recovery, and key economic indicators such as PMI, retail sales, and trade balance data. While gold outperformed silver last year, this year, silver is expected to match or even surpass gold’s returns, driven by both industrial and safe-haven demand,” he added.

Incidentally, Silver ETFs have demonstrated strong performance over the past year, delivering returns above 30%. The Aditya Birla Sun Life Silver ETF led with 32.46%, followed by ICICI Prudential Silver ETF (32.39%) and Axis Silver FoF – Direct Plan (32.37%). Other funds, including Kotak, HDFC, and DSP Silver ETFs, also posted returns exceeding 32%.

Industrial demand and supply constraints

Anil Ghelani, Head of Passive and Products at DSP Mutual Fund emphasized silver’s unique dual role as both a precious metal and an industrial commodity. “Unlike gold, which is mainly used for investment and jewellery, silver has significant industrial demand in sectors like solar panels, electric vehicles (EVs), and 5G technology. This creates inelastic demand, meaning industries continue to buy silver regardless of price fluctuations,” he said. DSP Mutual Fund launched their Silver ETF in 2022.

“For the fourth consecutive year, silver supply has lagged behind total demand. Major silver-producing countries like Chile, Mexico, and Peru have faced labour strikes and policy changes that have constrained supply. This imbalance is a key factor driving silver prices higher,” added Ghelani while highlighting that silver has outperformed gold in 10 of the last 26 years. However, when silver outperforms, it often does so by a large margin, he said.

“During the recovery from the 2008 financial crisis, gold rose about 75% between 2008 and 2011, while silver surged 320%. Similarly, in 2009, gold was up 20% while silver gained 41%, and in 2010, gold rose 25% while silver jumped 75%.”

Should Investors Choose Silver Over Gold?

While silver presents strong growth potential, its volatility remains a key consideration for investors. “If gold drops 5%, silver might decline by 7-8%. However, during upward trends, silver tends to rise more sharply. Given its current valuation, silver appears more attractive than gold, but diversification remains essential,” said Ghelani.

Similarly, Modi also highlighted potential risks to silver’s upward momentum. “A slowdown in China’s economic recovery, a stronger US dollar, tighter monetary policies from the Federal Reserve, and geopolitical uncertainties, including the US elections, could limit silver’s gains,” he warned.

Looking ahead, Modi expects gold to reach Rs 90,000-91,500 with strong support at Rs 78,000. Silver, he predicts, will first target Rs 1,11,000 and could rise to Rs 1.25 lakh with buying opportunities in the Rs 92,000-94,000 range.

In a release, Zerodha MF CEO Vishal Jain stated that silver has the potential to play a role in both investment portfolios and modern industries. “Our Silver ETF provides investors with a valuable tool to diversify and capitalize on the metal’s unique characteristics,” the release quoted him as saying.

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