ICICI Prudential becomes fourth mutual fund house to halt fresh investments in Silver ETF FoF amid rising premiums

ICICI Prudential Mutual Fund has temporarily discontinued new subscriptions in its Silver ETF Fund of Fund (FoF) effective October 14, citing severe price distortion in the silver market. The fund house joins Kotak Mutual Fund, SBI Mutual Fund, and UTI Mutual Fund, which had also suspended fresh investments in their respective Silver ETF FoFs this month.

The move comes after domestic silver prices surged well above global benchmarks due to a shortage of physical silver; as a result, silver ETFs began trading at inflated premiums.

The AMC has decided to temporarily discontinue subscriptions through lump sum, switch-ins, and systematic transactions in the ICICI Prudential Silver ETF Fund of Fund. Existing Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) will continue unaffected.

Growing list of suspensions

Earlier, Kotak Mutual Fund, SBI Mutual Fund, and UTI Mutual Fund had announced similar measures. The reason across fund houses is consistent — the unavailability of physical silver has disrupted the ability of market makers to perform arbitrage between the spot and ETF markets.

Normally, a market maker buys silver in physical form and exchanges it with the asset management company (AMC) for ETF units, which are then sold on the exchange. This mechanism keeps ETF prices aligned with actual silver prices. But when physical supply dries up, the creation process stalls, and ETF units start trading at a premium, exposing new investors to overvaluation risk.

A recent report by Axis Mutual Fund titled “Silver: Structural Bullishness Meets Short-Term Pricing Risk” notes that silver is facing an unprecedented global demand-supply imbalance. Demand has surged due to its extensive industrial use in solar panels, electric vehicles, semiconductors, and electronics, while global mine output has stagnated.

Even central banks, traditionally focused on gold, have begun adding silver to their reserves. Domestically, the onset of the festive season has driven a sharp increase in demand, with India’s silver imports nearly doubling in September. The result is a domestic premium of 8–10 percent over international prices.

How Silver FoF pricing works

To understand why this affects investors, it’s important to see how Silver ETFs and FoFs are priced. The report from Axis Mutual Fund explains the price relationship flows through multiple stages:

LBMA Silver Price (Global): This is the international benchmark (in USD per ounce), which has surged to around $50/oz in October 2025 amid global demand.

Import Parity Price (India): The global LBMA price is converted to INR per kilogram using the prevailing USD/INR exchange rate, with customs duty and GST adding roughly 10–12%. Under normal conditions, this price aligns closely with the domestic physical market.

India Physical Silver Price: This is the actual trading price in Indian bullion markets or on the MCX. Currently, 5–10% above import parity due to festive demand and shortage.

Silver ETF NAV: The ETF’s Net Asset Value reflects the value of physical silver held by the fund. It is calculated based on the LBMA price adjusted to INR and includes the domestic premium. Hence, when local prices rise above global levels, the ETF NAV automatically increases.

Silver ETF Market Price: This is the trading price of the ETF on the exchange. It should track the NAV closely but can diverge when arbitrage is constrained, as seen recently, when ETFs traded even higher intraday due to unit creation delays, adding an extra layer of premium before normalising.

Silver FoF NAV: A Silver Fund of Funds invests in the underlying Silver ETF. Its NAV reflects the ETF’s NAV, meaning FoF investors indirectly bear the same premium. They don’t pay an additional premium, but they are not insulated from overvaluation in the ETF.

In short, when domestic silver trades at a premium, that premium cascades through the entire structure from physical silver to ETF NAV to ETF market price to FoF NAV. Since in FOF buyer invests by looking at NAVs, it does not show the exact premium in silver price, unlike ETFs, which is direct buying and selling at the current prices.

Implications for investors

The 8–10 percent premium Indian investors are paying today effectively means they are buying silver at a higher price than its global fair value. If supply normalises and the domestic premium narrows, ETF and FoF NAVs could fall even if global silver prices remain stable.

The temporary suspension of new investments is a protective measure. For now, investors are advised to wait for market stability before making new allocations. Those already invested can stay put if their horizon is long-term, as the metal’s fundamentals remain strong despite near-term pricing risks.