The capital market regulator, the Securities and Exchange Board of India (SEBI), has released guidelines for exchange-traded funds (ETFs) that invest in precious metals such as gold and silver.
These modifications, according to SEBI, will take effect 30 days after they are published in the official gazette. The new rules will make it easier for investors to make an informed judgment about whether or not to invest in such a commodity.
The investment objective of Silver ETFs, according to SEBI, will be to achieve returns that are consistent with the performance of physical silver in local prices, subject to tracking error.
Here are the general contours of the silver ETF into which you will soon be investing.
The silver ETF will attempt to produce returns that are comparable to those of real silver at current domestic pricing. The fund firms have been instructed to keep the tracking inaccuracy below 2%. Simply put, tracking error is the difference in returns between the benchmark and the scheme.
If the tracking inaccuracy exceeds 2%, the fund house must make a prominent announcement on its website.
According to the London Bullion Market Association, the investment house will purchase actual silver standard 30KG bars with a purity of 99.9%. (LBMA). The price of silver will be used to benchmark silver ETFs (based on LBMA Silver daily spot fixing price).
Silver-based Exchange Traded Commodity Derivatives (ETCDs) will be deemed "silver related instruments" for silver ETFs. The scheme's exposure to such ETCDs will not exceed 10% of its net asset value. The 10% limit will not apply to silver ETFs whose purpose is to take actual silver delivery rather than roll over their position to the following contract cycle.
The regulator has requested fund companies to follow mutual fund requirements when it comes to the scheme's expense ratio, as well as the computation and disclosure of the scheme's net asset value (NAV). The expense ratio, like any other ETF, cannot exceed 1% of the scheme's AUM.
On a daily basis, the AMC website will publish the NAV of Silver ETFs, which will be calculated to four decimal points. The price of silver will be used to benchmark the Silver ETF Scheme(s) (based on LBMA silver daily spot-fixing price).
The physical verification of silver underlying the Silver ETF units will be carried out by the mutual fund's statutory auditor, who will report to the trustees every six months.