In today’s unpredictable investment landscape, investors are constantly on the lookout for assets that can protect their portfolios during market uncertainty. Traditionally, gold has served as a safe haven but due to its high prices, investors are now seeking new assets to add to their portfolio as a hedge against volatility.
Due to this, another precious metal, silver, is increasingly gaining attention for its dual identity as both a precious metal and an industrial asset. In this blog, we will explore how silver-focused funds act as a hedge during volatile markets.
What Are Silver-Focused Funds?
Mutual fund schemes that invest directly in silver through silver Exchange Traded Funds (ETFs) or indirectly through Fund of Funds (FoFs) are known as silver-focused funds. In 2022, silver-focused funds were launched in India, and they quickly gained popularity among investors who seek to gain exposure to silver metal without having to deal with the inconveniences of physical storage or commodities market trading.
To ensure transparency and investor safety, silver-focused funds are managed by AMCs and regulated by SEBI. Silver mutual funds offer features like SIPs, liquidity, NAV-based pricing, and professional fund administration, and they mimic the price movement of silver, allowing investors to benefit from its market trends while offering several benefits.
Some of the popular silver mutual fund options include ICICI Prudential Silver ETF, Nippon India Silver ETF, and HDFC Silver ETF Fund of Fund.
Why Are Silver-Focused Funds Considered a Hedge?
There are many reasons behind the popularity of Silver-Focused Funds in volatile times. Some of these reasons are listed below:
Safe Haven During Economic Uncertainty
Silver is also viewed as a safe-haven asset during times of market turmoil, geopolitical tensions, or financial crises when in MF comparison with equity funds. Investors seek out silver to minimize losses when traditional assets like stocks and bonds are underperforming. While gold is often the first choice for a safe haven, silver’s similar properties and lower price points make it an accessible alternative for many investors.
Industrial Demand
Unlike gold, a significant portion of silver’s demand comes from industrial uses. It is used in various industries such as electronics, solar panels, and medical devices. This dual role as both a precious metal and industrial metal means that silver’s price can benefit from both safe-haven demand and economic growth, providing additional support during inflationary or expansionary periods.
Hedge Against Inflation
One of the primary reasons silver is considered a hedge is its historical ability to protect against inflation. When inflation rises and the value of money declines, the price of silver often increases, helping investors maintain their wealth. This is because silver, as a finite resource, cannot be created at will like paper money. Its price increases when the supply of money expands or when there are concerns about currency devaluation.
Portfolio Diversification and Low Correlation
Silver’s price movements are not closely tied to those of equities or bonds, giving it a low correlation with traditional asset classes. This makes silver an effective tool for diversification, as it can help stabilize portfolio returns and reduce overall risk, especially during periods when stocks and bonds are underperforming.