The fund industry can surely find a way around cost and storage-related obstacles

When it comes to new product launches, mutual fund houses often behave like sheep. If the fund industry is keen to add assets, why doesn’t it conduct an online poll of investors to see what funds they are really interested in?

One category of funds that our readers have frequently asked for is silver exchange-traded funds (ETFs). Today, the time appears particularly opportune for silver ETFs with a global recovery burnishing the prospects for silver (thanks to rising industrial application during periods of recovery), its rising affordability and the fact that it has no import restrictions. So, why haven’t silver ETFs made their debut yet, even though we have over half a dozen gold funds?

Regulation

Problem one, it appears, has to do with who will regulate them. While the Securities and Exchange Board of India has powers to regulate securities such as stocks and bonds, commodity investments, it is felt, are under the remit of the Forward Markets Commission. So, when SEBI allowed fund houses to float gold ETFs, the FMC protested and the market regulator was given special permission to regulate gold ETFs. But with no such special treatment for silver, no one is clear about who will regulate silver ETFs, if these are launched. In fact, Benchmark Mutual Fund did try to get around this problem of regulatory turf, by filing for a feeder fund which will invest in silver ETFs listed abroad, but couldn’t get the go-ahead from SEBI due to lack of jurisdiction.

Storage

The second hurdle, fund managers explain, is with difficulties in storage and insurance of silver. Unlike equity or debt funds, which hold securities in electronic form, every unit of a commodity ETF has to be backed by the precise quantity of the physical asset. Now, all the gold ETFs in India put together manage about ₹8,700 crore in assets.

That represents about 29 tonnes of gold stashed away in vaults maintained by custodians. But as every gram of silver carries only a fraction of the value of gold, silver ETFs managing similar assets would have to store 1,933 tonnes of silver!

Fund houses would not only have to incur storage and custodial expenses on this silver but they would also have to insure it against losses, damage and theft. That may increase the expenses for investors. Currently, gold ETF managers say they incur insurance and custodial costs amounting to 0.25-0.30 per cent of the assets managed for gold ETFs. The costs for silver may be much higher.

Gold stocks held by ETFs are also subject to periodic physical audits by independent valuers, to confirm the quality and quantity of the metal held in custody. Silver ETFs too would have to be subject to such safeguards. But given the sheer quantities of physical stock involved, such verification, players claim, would be more expensive.

But investors may be willing to bear these additional costs, given that they do incur significant expenses towards locker rent on personal jewellery.

Quality

Fund managers also point out that the supply chain for silver is not as well-regulated or developed in India as that in gold and thus imported silver could suffer from purity issues. That would be an impediment to ETFs as they promise to exchange every unit of the underlying metal for money. But where there’s a will, there’s a way. If regulators are really keen to channel a higher share of the savings pie into the formal assets, they should work together to thrash out turf issues. If the fund industry is keen to genuinely diversify its product basket, it can surely find a way around cost and storage-related obstacles.

A few years ago, when equity funds were the rage, global funds, gold funds and retail bond funds appeared equally hard to manage too, with the underlying assets suffering from availability, liquidity or regulatory issues. But such funds are now a dime a dozen.

When the iShares Silver Trust, the first global silver ETF, made its debut in 2006, it attracted quite a bit of scepticism, both from the mining industry and from investors. But today it manages over $6 billion in assets and holds over 10,000 tonnes of silver.

(This article was published on January 26, 2014)
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