At present there is a tremendous rise in the prices of silver. Along with domestic demand, global prices, which are affected by reduction in supply, are also impacting domestic prices. All silver ETFs (exchange traded funds) are trading at steep premiums. Meanwhile, Kotak Mutual Fund has announced that its ‘Kotak Gold Silver Passive Fund of Fund (Kotak Gold Silver Passive FoF) will continue to invest in Kotak’s silver ETF. This will be done as underlying security.
Gold Silver Passive FoF is the new offering from Kotak. It has been launched recently. The objective of the fund is to generate long term capital growth from a portfolio constructed by investing in units of Kotak Gold ETF and Kotak Silver ETF. Kotak Silver Passive Fund FoF also invests in Kotak’s silver ETFs and money market funds. This means that the underlying asset of both the funds will be the same.
Earlier, Kotak Mutual Fund had announced to stop outright investment in Silver ETF FoF due to the ETF trading at a huge premium. The fund house is hopeful that silver prices will return to normal soon. After this the company will invest capital in this asset. A silver ETF is a fund that trades on a stock exchange and invests in the physical form of silver or silver-related instruments. ETF units are bought and sold like stocks, and their value fluctuates based on the price of silver.
Domestic price of silver is 10 percent above global price
Like gold, investment in silver has also increased as a safe asset. This has led to a huge jump in prices. The silver market has been affected by lack of liquidity in London. Due to this, there is a decrease in the supply of silver all over the world. Silver is not only used for making jewellery, coins, artefacts and as an investment option, it is also used in industries. Domestic silver prices are running about 10 per cent higher than international prices.
How do ETFs start trading at a premium when silver rises?
A market maker purchases physical silver and exchanges it for ETF units with an asset management company (AMC). These are then sold on the exchange. This process generally helps keep the ETF price in line with the real price of silver. But when the physical supply of the metal decreases, the creation of new ETF units slows or stops. This causes ETFs to trade at a premium. Due to this, there is a risk of overvaluation for new investors. This is the reason why there was a jump in the NAV i.e. net asset value of silver ETFs and FoFs. This is sometimes at a premium to even the indicative NAV.
This is the reason why Kotak Mutual Fund stopped lump sum investment in its Silver Fund of Funds. Nilesh Shah, managing director of Kotak AMC, called it a prudent step to protect the interests of investors. Kotak MF has said that it will reopen for new subscriptions once the premiums are stabilised. Shah told CNBC-TV18 in an interview that if it had been allowed under SEBI rules, he would have stopped investing in silver ETFs also. After Kotak Mutual Fund, many other fund houses including SBI Mutual Fund, UTI Mutual Fund, HDFC Mutual Fund stopped investing in their respective silver funds of funds.
Allocation date of Gold Silver Passive FoF is 28th November.
The allocation date for Gold Silver Passive Fund of Funds (FOF) is 28th November. The allocation between gold and silver will be decided on the basis of an internal model. About 5 percent of the fund will be invested primarily in currency market instruments to maintain liquidity. The remaining 95 percent will be invested in precious metals.