Silver ETFs vs Fund of Funds: What you need to know about tax implication and costs

In an uncertain world, gold has continued to retain its lure as a safe-haven asset, but quietly, silver too has been catching on the attention of savvy investors – and with good reasons. Once considered as the ‘poor man’s gold’, silver is now gaining momentum not just as a precious metal asset, but also as a play on the rapidly expanding industrial and green energy transition.

As inflation, global instability and market uncertainty loom large, silver is emerging as a compelling investment alternative, with more accessible options for Indian investors than ever before.

Take a look at silver’s fundamentals. The metal is facing a structural supply deficit, and now for four years in a row, global demand has outpaced supply, with 2024 seeing a shortfall of 149 million ounces – roughly 15% of total available silver. “Despite a 1.7% on-year increase in global silver supply to 1,015.1 million ounces (Moz) in 2024, the total demand, which stood at 1,160.1 Moz, resulted in a supply deficit of approximately 149 Moz (about 15% of total supply). This marked the fourth consecutive year of a silver market shortage, ” said wealth management firm Client Associates’ recent report titled The Investment Case for Silver.

What’s driving this crunch is silver’s rising industrial demand, especially from sectors like solar energy, electric vehicles (EVs), and electronics. Despite a drop in investment demand and jewellery consumption and photographic applications in 2024, industrial use has remained robust – up by 3.6% on-year.

The gold-to-silver ratio – a historic measure comparing prices of the two metals – currently hovers around 90, well above its long-term average of 68, signalling that silver may be undervalued relative to gold, with many analysts predicting a 15–20% upside in the near-to-medium term if gold stabilizes. “From current levels, silver could potentially offer 15–20% upside over the next 1–2 years, supported by supply-demand dynamics, global growth trends, and the gold-silver ratio,” the Client Associates report said.

While long-term returns on both silver and gold converge, silver often provides a higher short-term return, though with more volatility. In last one year, while gold has given an annual return of 32%, silver has registered a gain of 27%, while over a period of five years, gold has given a CAGR of 11%, with silver offering 9% return.

Beyond higher short-term returns, silver offers portfolio diversification benefits, as its correlation with Sensex is low at 0.21, making it a strong hedge if equity markets get choppy.

Silver: ETFs vs FoFs

In India, investors can now access silver in digital form via Silver ETFs (Exchange Traded Funds) or Silver ETF FoFs (Fund of Funds), both offering exposure to silver without the hassle of physical storage, though they differ in cost, convenience and taxation.

Silver ETFs are funds that invest directly in physical silver, and trade like equities on exchanges. They require a demat account and may not be ideal for very large transactions due to potential liquidity issues.

Silver ETFs in India

Silver FoFs, on the other hand, invest in Silver ETFs and don’t need a demat account. They are more accessible to everyday investors and offer better liquidity, especially for high-value investments. However, FoFs come with higher costs. While Silver ETFs charge lower expense ratios (ranging between 0.40% to 0.56%), their FoF counterparts are costlier, with expense ratios between 0.70% and 0.96%.

Silver FoF options

Tax Treatment: Holding period matters

Taxation is another factor that differentiates these options. If you hold a Silver ETF (considered an exchange-listed asset) for over 12 months, you pay 12.5% tax on long-term capital gains, while you are taxed on gains as per your income slab if you sell earlier.

For Silver FoFs, the definition of long-term is longer – 24 months. If one sells before that, gains are added to the income and taxed at slab rates, whiel selling after 24 months invites taxation at 12.5%.

Tax difference between ETF and FoF

Those with demat accounts and looking for lower costs and shorter holding periods can consider Silver ETFs. However, for easier access to investment or deploying large sums, and for those without a demat account, FoFs make more sense despite a higher cost, according to experts.

As investors look beyond gold, silver’s unique blend of industrial relevance and investment potential offers a compelling case for allocation. With ETFs and FoFs making silver accessible, this may just be the time to add a little shine to your portfolio in a smart and tax-efficient way.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.