Why Top Mutual Funds Are Stopping Investments in Silver ETFs?

India’s top mutual fund houses, including Kotak Mahindra, SBI, UTI and ICIC Prudential, have hit the brakes on fresh lump-sum investments in their Silver ETF Fund of Funds (FoFs). The move comes in the middle of a sharp rise in silver prices and a supply shortage in the domestic market.

What Are Silver ETFs and FoFs?

A Silver Exchange-Traded Fund (ETF) functions much like a stock. It is listed on exchanges and mirrors the market price of silver. Investors gain exposure to the precious metal’s price without physically buying, storing or insuring it. Most Silver ETFs are physically backed, meaning these funds use investor money to purchase and safely store 99.9% pure silver bars. Each ETF unit represents a fractional claim on that silver.

A Silver ETF Fund of Funds, on the other hand, invests in the underlying Silver ETF, often managed by the same fund house. It is a convenient choice for investors who prefer to avoid demat accounts or choose a systematic investment (SIP) route over one-time purchases.

Must Read: Kotak MF Stops Lumpsum Investments in Silver ETF FoF

Why Have Fund Houses Stopped Accepting Lump Sum Investments?

According to fund managers, the primary reason for halting new lump sum investments is to protect investors from overpaying. Due to a temporary shortage of physical silver in India, local prices have skyrocketed, trading at a massive 10–12% premium to international import parity prices, far above the typical 0.5% range.

With rising investor demand, Silver ETFs are being forced to buy silver at these inflated prices. Any fresh lump sum inflows would, therefore, mean investors are purchasing silver at artificially high levels, exposing them to immediate losses once the premium corrects.

Compounding the problem, the lack of physical silver has made it difficult for fund houses to create new ETF units at their indicative Net Asset Value (iNAV). To maintain fair value and investor interest, Kotak, SBI, UTI and ICICI Prudential Mutual Fund have chosen to suspend fresh FoF inflows temporarily.

Also Read: SBI MF Suspends New Lumpsum Investments in Silver ETF FoF

Why Silver ETFs Still Trade Freely?

Unlike FoFs, ETFs trade on stock exchanges between investors. These trades do not directly involve the fund house, which means asset managers can not restrict transactions even when prices differ from basic prices. Consequently, Silver ETFs continue to trade, though currently at expensive premiums that reflect the domestic silver shortage.

What Should Investors Do Now?

Experts advise being careful. Silver’s long-term outlook remains upbeat, thanks to its growing use in green technologies like solar power and the ongoing supply shortfall. However, with prices already surging 49% in the last three months and nearly 79% over the past year, fresh lump sum investments could be a risky proposition.

Instead, analysts suggest investors build their precious metals exposure gradually. Allocating 10–15% of one’s portfolio to gold and silver, accumulated in a disciplined manner, is seen as a more innovative long-term approach during these volatile times.

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