The Buyt Desk
A new mutual fund has been launched which lets you invest in a combination of gold and silver ETFs in equal allocation. Let us understand it better.
In India, AMCs (Asset Management Companies) are the ones always launching innovative financial and investment products. Lately, one such AMC Edelweiss Mutual Fund launched a new scheme combining silver and gold into a single product. Gold and silver exchange-traded fund (ETF) was independently already available but now it is mixed in equal allocation and maintained through periodic rebalancing. This new product is first of its kind combining metal ETFs.
When you want to manage only one ETF for precious metals, you can go for this combined ETF with 50:50 allocation to silver and gold. In this product the AMC invests the investor’s funds in a mix of gold and silver ETFs. AMC may not have an ETF of its own, so it will select ETFs of other AMCs based on many factors.
What is the nature of gold and silver prices?
Though both silver and gold are precious metals, the economic sensitivities and demand supply forces of both are very different. Prices of both the precious metals are correlated but their dynamics differ. Gold is the initial trigger of bullion space and then comes silver. In the short term, silver is 2-3 times more volatile when compared to gold.
Gold
In India, Gold is always in high demand and most precious. History shows us that gold is premium metal when compared to silver and a good barrier against inflation. Gold rate is not directly associated with equity markets but associated with geopolitical factors impacting it and the supply-demand equation. This is the main reason for gold rates to remain the same for a long time and then there is sudden fluctuation. Few assets can be valued based on intrinsic value and cash flow but gold cannot be easily valued.
Silver
Gold is just a precious metal but silver is a precious metal used for industrial usage as base metal. This makes the silver rate more volatile when compared to gold. Like other precious metals, silver also is a good barrier against economic and geopolitical uncertainties. It is mostly used as a base metal with industrial demands so to an extent it is associated with the global economy. .
Below is a table by one of the AMC which shows returns of gold, silver and equity for the last 4 years.
|
2017 |
2018 |
2019 |
2020 |
2021 |
|
|
Silver |
-2.8% |
-0.2% |
21.8% |
44.4% |
-8.2% |
|
Gold |
5.1% |
7.9% |
23.8% |
28% |
-4.2% |
|
Nifty50 |
30.3% |
4.6% |
13.5% |
16.1% |
25.6% |
Do investors need precious metals in their portfolio?
Investors can go for investment in precious metals when they have a vast portfolio. Even when investors do not want to invest in anything except equity and debt then for long term investments they can go for precious metals like gold. This is more of a portfolio diversifier and should not be considered as core components of a portfolio like debt and equity. Investors are advised to not go for more than 5-15 % allocation in the portfolio.
Which one should be selected – gold or silver?
Both the precious metals move in the same direction when it comes to price fluctuation. But silver price is more volatile as it is used in industries while gold is more stable during economic slowdowns. Because of this it is advisable to give more stress on gold than silver when it comes to investment. Maybe you can go for 70+% to gold and 0-30% to silver in your precious metal allocation in your portfolio. Silver can be completely omitted if not required.
Should investment into a new combined gold and silver mutual fund be considered?
Never ever take investment decisions in hurry. Firstly, analyze your needs and financial goals. Next is to completely understand the new mutual fund offers and look for new things that it provides which you don’t have. Then see if it fits in your plan and fulfils your needs. If it deviates from your plans then straight away reject it. Sometimes this new product may not add or disturb your plan. Then it is up to you to decide. Mostly this new product is not needed for most of the investors.
From a general asset allocation perspective, gold is good enough when it comes to precious metal allocation and silver is not needed. There is a silver-demand theory which says that the silver value will rise in the near future because of its extensive use in industries including smart devices, electric vehicles, solar equipment and more. Consider investing in silver only if you believe in this silver-demand theory.
If you want to combine the resilience of gold with the potential rise of silver into one ETF then you should go for this new product which combines gold and silver into one single ETF with 50:50 allocations. Also you need not handle multiple ETFs for gold and silver but just one ETF.
