Once you decide to own the white metal through the stock exchange, a practical question follows: which fund should you choose? Several fund houses offer similar products, and the differences, though subtle, can affect your returns over the years. Many readers who first ask what is Silver ETF soon discover that comparing options is the real challenge. This article explains the factors that separate one fund from another, so that your choice among available Silver ETFs rests on facts rather than guesswork.
Start With the Expense Ratio
All funds have an annual management fee charged as a percentage. This fee will cover the management, custodian, audit and administration costs of the fund. This will come off behind the scenes, but you will not be making any cheques to pay for it; however, it will reduce your return.
The spread between the funds can seem like nothing, but when looking at funds over 10-15 years it will make a noticeable difference. Look at the expense ratios, but remember that the lowest ratio does not necessarily mean it is the best fund; there are other factors to consider.
Liquidity and Spread
Liquidity refers to how easy it is to buy/sell without affecting the price. A highly liquid fund (High volume of trades) will have a small amount between the bid/ask price (spread). Whereas a less liquid fund may have large spreads.
Look at the average volume over the last couple of weeks and the live data while it is in trade. If there is a large bid/ask spread, then you may want to look for another fund or wait for a better time. Always use limit orders.
Tracking and Premiums
A well-managed fund should track the price of the metal very closely. This difference in performance is known as tracking error and comes from several factors such as fees, cash and running costs. You can see historical tracking by looking at the fund’s fact sheet. The lower the number, the more tightly managed the fund is likely to be.
Compare the market price with the indicative price during the day. Sometimes there can be large amounts of buying, which can cause the price on the exchange to increase above the value of the underlying. This is known as a premium. You do not want to pay a premium as it will reduce your returns. However, if there is an unusually high premium, then you may want to wait a little or look for an alternative fund.
Fund Size and Backing
Generally the larger the fund the better the liquidity and the lower the running costs per unit. You can check that the fund is holding the actual metal (with the correct purity) by looking at the scheme documents. Ensure that it is held by an independent custodian and that regular audits are shown.
If the fund house has a good reputation with long standing asset management companies who have clear reporting and quick response to investors then this is another positive. This information will be included in the fact sheet and offer document.
Direct Units or Fund of Funds
You have two main options to gain exposure. Either buy the units directly on the exchange via a demat account or invest in a fund of funds. A fund of funds means you can invest small amounts each month and do not need a demat account – ideal for beginners.
Funds of funds come with their own fee which means you will be paying more. If you are looking to invest larger amounts or for longer periods then it is usually cheaper to invest directly. However if you are looking to invest small amounts and automate your savings then it may be worth paying the extra.
Tax
Currently if you hold the units for more than 12 months they will be classed as long term investments. This means you will pay a flat tax on the gain made. If you sell them within 12 months they will be classed as short term. This means the gain will be added to your income and you will pay tax according to your slab. Funds of funds can differ with regards to how long you need to hold them. Check the details.
Taxes can change frequently so it will depend on your personal situation. Ensure you know what the latest rules are or speak to a qualified professional before making large investments. Keep all your contract notes and statements so it is easy to work out how much you paid and gained.
Additional Costs
In addition to the fund fee, you will also have to pay brokerage, exchange transaction fees, tax on these fees and a yearly demat fee. If you are making lots of small investments then this can quickly add up. Try to batch your orders and look for a broker who offers good rates.
Simple Checklist
Expense Ratio, Average Volume and Spread. Tracking History, Stable and small premiums. Fund House, Custody and Fund Size. Direct Units or a fund of funds, depending on how much you are looking to invest and how you like to save.
Make a note of your decision. Date, Price, Quantity and Reasons. Set yourself a reminder to check each year. It takes a little time to be careful but will prevent you from paying unnecessary costs and being disappointed. If you choose the correct fund, invest sensibly and get into a routine, then holding the white metal in your demat account will be a simple and clear part of a thoughtful financial plan.