Explained: SEBI’s new rules on silver ETFs for mutual fund investors

The Securities and Exchange Board of India (SEBI) has tweaked the rules for the introduction of silver exchange-traded funds (ETFs), a move the capital markets regulator hopes will channel more investments into the precious metal via mutual funds. 

The development is significant since up until now mutual funds in India have been allowed to launch only gold ETFs. 

What exactly is an ETF?

An ETF is basically a security instrument that tracks an index, commodity, sector or any other asset class. An ETF’s value fluctuates in tandem with the fluctuations in the value of the underlying asset or commodity it is tracking.

ETFs can be traded on exchanges just like stocks and bonds. ETFs can either track a single kind of underlying commodity or asset class or can track several different types of investments at the same time. 

What exactly has SEBI done now?

SEBI has amended the rules to enable the introduction of silver ETFs. The regulator has said that a silver ETF scheme means a mutual fund scheme that invests primarily in silver or silver-related instruments which have the white metal as the underlying product.

“Mutual fund schemes investing in exchange-traded commodity derivatives may hold the underlying goods in case of physical settlement of such contracts,” SEBI has said. 

Where will the underlying assets actually be kept?

SEBI has mandated that in case of silver ETFs, the assets of the scheme being silver or silver-related instruments may be kept in the custody of a custodian registered with the regulator. 

Are there any restrictions on the silver ETF schemes that will now be introduced?

Yes, these schemes will be subject to some restrictions. The funds of any such scheme will be invested only in silver or silver-related instruments in accordance with its investment objective and the mutual fund may invest such funds in short-term deposits of scheduled commercial banks, the market regulator has mandated.

But how will the underlying asset held by such ETF schemes actually be valued?

The regulator has said that silver held by a silver ETF scheme will be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for silver having a fineness of 999.0 parts per thousand.

What do analysts feel about the latest move by SEBI?

Analysts say the new move will allow investors to diversify their portfolios and add silver as an investment option in the mix.

“Additionally, it will help investors to diversify their portfolio as part of their asset allocation, due to low correlation with other asset classes,” Hemen Bhatia, deputy head of ETF at Nippon Life India Asset Management Ltd, told The Economic Times. 

Chintan Haria, product and strategy head at ICICI Prudential Asset Management Company, told The Hindu Business Line that people in India traditionally have been investing in gold and silver physically as they are considered to have a store of value. “Since silver is bulky in nature and hence difficult to store, we believe the ETF form will be one of the preferred ways for investors to take exposure to silver in financial investment form,” he added.