Silver ETF FoF for First-Time Investors: Everything You Need to Know

A silver ETF Fund of Fund (FoF) is an open-ended fund of fund mutual fund scheme that uses pooled money from multiple investors to buy units of silver ETFs. The underlying silver ETF invests in physical silver. Simply put, it provides a mutual fund route for investors who want exposure to silver but may not wish to buy silver ETFs directly on the stock exchange. The silver ETF tracks the domestic price of silver (subject to tracking errors). Silver ETF FOF allows investors to gain exposure to the price movements of Silver ETF through their usual MF investment account, without needing a Demat account. 

Here’s how a silver ETF FoF actually operates:
 

Step 1: An investor invests in the silver ETF FoF

An investor buys units of the silver ETF fund of funds through a mutual fund platform. This could be done through a lump sum investment or through an SIP.
 

Step 2: The fund invests in the silver ETF

The mutual fund collects money from multiple investors to buy units of a silver ETF. 
 

Step 3: The silver ETF holds physical silver

The silver ETF, in turn, buys physical silver (primarily silver bars of 99.9% purity) and stores the same with a custodian. Apart from physical silver, silver ETFs may also invest in Exchange-Traded Commodity Derivatives (ETCD) within the limits specified by SEBI. 
 

Step 4: Silver ETF FoF price changes with movements in silver prices

The NAV of a silver ETF FoF changes based on the performance of the underlying silver ETF, which is linked to the domestic price of silver. When silver prices move in the market, the prices of silver ETFs may also change, which in turn affects the NAV of the silver ETF FoF. 
 

Step 5: Investors can buy or redeem FoF units

Investors can buy and sell units of the silver ETF fund of funds through their mutual fund account. This works just like buying or selling any other mutual fund unit.

So, why should you consider investing in silver ETF FoFs? Here’s a list of advantages you can consider:
 

1. No Demat account required

You don’t need to have a Demat and trading account to invest in or redeem units of a silver ETF FoF. Unlike direct silver ETF investments, where Demat accounts are mandatory, silver ETF FoFs don’t have such requirements. You can invest in a silver ETF fund of funds using your regular mutual fund account.
 

2. Start Small with SIPs

Most beginners want to start small. Silver ETF FoFs offer that opportunity. If you wish to start investing in silver ETF FoFs, you can do so with monthly SIPs of as little as Rs. 500. You can set up an auto-debit mandate with your bank to have the SIP amount automatically invested into the silver ETF FoF scheme for a disciplined and consistent approach. 
 

3. May Help You Spread Risk and Diversify 

Generally, silver has a low correlation with equities, meaning it may be a good option for diversification and portfolio risk management. Investing in silver ETF FoFs can help spread the investment risk in your portfolio and potentially reduce the impact of volatility on your returns. 
 

4. Liquidity

Since silver ETF FoFs are a type of mutual fund scheme, the process of redeeming units is the same as any other MF scheme. So if you need funds urgently, you can place a redemption request through your investment platform, and the money will be credited within the set redemption timelines. Additionally, there are no lock-in periods (but exit loads may apply if withdrawn generally within 15-30 days of investment), so easy liquidity is always available.

Now, as a beginner, you might still be unclear about the differences between silver ETF FoFs and silver ETFs. But understanding these differences is key to making suitable investment decisions. Here’s a table that sums up the key differences between silver ETF FoFs and silver ETFs:
 

By now, you must be wondering about the suitability of silver ETF FoFs. A silver ETF fund of fund may be considered by investors who::

• Investors who want exposure to silver without physically holding the asset.

• Investors who want to diversify beyond equities and debt assets.

• Investors without a Demat and trading account

• Investors with a medium- to long-term investment horizon.

Next on our guide is how to get started with your silver ETF FoF investments. Because silver ETF FoFs work like any other MF scheme, the steps you need to take to get started are largely similar. 

You can invest in a silver ETF FoF through two routes: directly through the AMC or through a mutual fund distributor or investment platform. Let’s understand both in detail:
 

1. Direct Investment Through the AMC

If you want to invest without a distributor, you can choose the direct plan of the silver ETF fund of fund through the AMC. Here’s what you need to do:

• Visit the asset management company’s website or app offering the silver ETF FoF direct plan.
• Complete your KYC verification if it is not already done.
• Select the silver ETF fund of fund scheme you wish to invest in.
• Choose a preferred investment method: lump sum or SIP.
• Complete the transaction using the available payment options such as net banking or UPI.

Direct plans usually have a lower expense ratio because there is no distributor commission.

2. Investment Through a Distributor or Investment Platform

You can also invest in a silver ETF FoF through a registered mutual fund distributor, broker, or online investment platform. Here’s what you need to do:

• Open an investment account with a mutual fund distributor or investment platform (log in if you already have an account)
• Review the silver ETF fund of funds schemes and select your preferred scheme.
• Choose your investment amount and mode (lump sum or SIP).
• Complete the payment and confirmation.

In the regular route, the distributor assists with transactions and portfolio servicing, and the expense ratio includes distributor commission.

Before investing in a silver ETF fund of funds, it is important to consider a few key things, such as:

1. Commodity price volatility
Silver prices can move sharply due to changes in global demand, industrial usage, currency movements, and economic conditions. This can lead to short-term fluctuations in returns.

2. Expense structure
A silver ETF FoF carries two layers of costs. So, as an investor, you’ll have to bear the expense ratio of the FoF as well as the expenses of the underlying silver ETF.

3. Investment horizon
Commodity-based investments often experience cyclical price movements. That’s why investors may need a longer horizon to navigate such fluctuations.

4. Portfolio allocation
Silver investments are usually considered a supplementary allocation rather than the core of a portfolio. Investors should evaluate how much exposure they want to commodities.

5. Tracking differences
Since the FoF invests in an ETF that tracks silver prices, returns may differ slightly from the actual price movement of silver due to tracking error and fund expenses. A lower tracking error generally indicates that the fund’s performance is closer to the price movement of silver.

A silver ETF FoF lets you invest in silver through a mutual fund. Instead of buying physical silver or trading ETFs on an exchange, the fund invests in units of a silver ETF for you. This can make it easier for investors to gain exposure to  silver through familiar mutual fund investment platforms.

However, returns still depend on how silver prices move in the market. Like any commodity investment, prices can fluctuate. Before investing, it is important to understand how the fund works and how much exposure to silver fits within your overall portfolio allocation.

Fund of Fund Disclaimer: - 

“Investors are bearing the recurring expenses of the scheme, in addition to the expenses of other schemes in which the Fund of Funds Scheme makes investments”

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 

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