Let silver shine on your investment horizon

With the phenomenal rise in the prices of silver over the last two years, especially the white metal touching the peak of Rs75,000 recently, it has caught the fancy of many an investor. Traditionally gold and silver are supposed to provide hedge against inflation.

Taking cognizance of investors’ mood and the market favouring precious metals, nowadays, financial planners are advising their clients to allocate around 10%-15% of their portfolio in bullion. It not only gives diversification to the portfolio but also helps in reducing volatility in portfolio.

As you know, returns on equity and currencies are linked to stability in the financial markets and geo-political stability. However, the prices of equity and bullion are normally inversely correlated with the above. This implies that the prices of silver and gold go up when there is volatility in equity and currencies of developed markets or if there is some political unrest in any corner of the world.

Only two major metals, gold and silver, are available as far as investment in bullion is concerned. Gold has various modes available for investment. You can invest in gold through jewellery or gold bars. You can also purchase gold coins from banks or jewellers. In addition to purchase of gold in physical mode you can also make your investments in electronic mode through gold ETF, Gold fund units or E-gold. However, compared to gold you do not have these many options available as far as investment in silver is concerned.

In the physical sphere you can invest in silver through silver utensils, silver coins or silver bars. Currently, banks do not provide the option of investing in silver, whereas you can invest in gold through your bank.

Till date not a single silver ETF or silver fund scheme has been approved by the Securities and Exchange Board of India (SEBI). So you do not have the option of investing in silver either through exchange traded funds or silver fund schemes of mutual funds. Presently, there is only one method available for you to invest in silver electronically i.e. through investments in E-silver products of National Spot Exchange (NSEL).

Investment in physical mode has various concerns like purity, safety and storage cost. You can avoid these concerns if you invest in silver through E-silver units of NSEL. This product is useful for those who want to benefit from volatility in the prices of silver as the purchase and sale of silver in this mode do not require physical handling of silver.

The objective of this article is to create awareness about methods of investment in silver and their pros and cons, and not to advice you on timing of making the investment.

Basic requisite
For making investment in silver through E-silver units of NSEL, you need to have a broking account with a broker registered with NSEL. In addition to this you also need to open a demat account for parking these electronic units. Please note that the existing broking account and demat account opened by you for the purpose of making transactions in equity, bonds, etc are not useful for making investments in E-silver units.

Units of trading
Silver can be purchased in a lot of 100 units of E-silver which is equivalent to 100 grams of silver. The payment and delivery mechanism is similar to the one followed in making investments in shares and securities on stock exchanges. The broker will charge brokerage fee for carrying out purchase and sale on your behalf, which is generally similar to what is being charged by your stock broker. Once you have paid for the units of E-silver purchased as per the payment settlement schedule, the electronic units of E-silver are credited to your demat account. The depository participant will charge you an annual charge for your demat account like your equity account.

Taxation
Since electronic units of E-silver are nothing but silver held by you in electronic format, you will be liable to pay capital gains tax in respect of any profits earned by you on sale of E-silver units. The capital gain will be treated as short-term in case you have sold the units after having held them for 36 months. In case these are sold after 36 months the long-term capital gains is taxable at the rate of 20%. Please note that there is difference between tax treatment of units of mutual funds and units of E-silver. The units in mutual funds become long-term on completion of 12 months whereas the E-silver units have to be held for a period of more than 36 months for being treated as long-term.

The applicable tax rate is also different. In case these E-silver units are sold within 36 months, the gain is short-term and will be included in your other incomes and taxed at the slab rate applicable to you.

If you purchase and sell silver in physical mode, you have to pay sales tax every time you buy or sell silver. However, sales tax is not charged on purchase and sale in electronic mode, thus you save on sales tax component also if you deal in E-silver instead of physical silver.

Physical delivery
You can take physical delivery of the units of E-silver lying in your account as and when you want. The physical delivery can be taken in specified denomination of silver bars only. For taking physical delivery of silver against your units you have to pay an amount of ¤150 per delivery irrespective of the quantity of silver involved in each delivery. In addition to delivery charges you also have to pay making charges for silver coins or bars. Presently, the exchange charges an amount of ¤100 for each coin of 100 grams and ¤200 for each bar of 1 kg or 5 kg.  

In addition to the above charges, you will have to pay sales tax at the rate of 1% on the value of the silver.

Balwant Jain is chief financial officer, Apnapaisa.com, price & features comparison engine for loans, insurance and
investments. He can be reached
at balwant.jain@apnapaisa.com.