Gold and silver exchange-traded funds (ETFs) are now among the top five picks financed by brokers under the margin trade funding (MTF) facility on the National Stock Exchange (NSE). The trend reflects investors’ growing appetite for portfolio diversification amid rangebound markets and external headwinds.
While the popular SilverBees, or Nippon India Silver ETF, held the top spot on brokers’ MTF books as recently as 1 February, Nippon India’s gold ETF, GoldBees, which ranked seventh as of that date, surpassed silver to move to the third slot, with the latter at the fifth place as of 9 February, according to NSE data.
GoldBees was third only to Hindustan Aeronautics Ltd (HAL) and Jio Financial Services, which were the top two MTF picks. Broker funding for GoldBees was at ₹1,246 crore, while that of SilverBees was ₹1,201 crore as of 9 February. HAL, at ₹1,620 crore, was the top MTF pick, followed by Jio Financial Services at ₹1,303 crore. ITC ranked fourth, with funding of ₹1,213 crore.
MTF allows investors to pay only a portion of the value of a stock or an ETF, with the broker financing the remaining amount.
While margins keep changing based on the volatility of the underlying stock or precious metal, Ashish Nanda, chief business digital officer at Kotak Securities, said that the margins for gold and silver that a client must pay are currently in the range of 30-40%, depending on the broker. This means an investor typically needs to put in around 30-40% of the amount, depending on the product's volatility, implying leverage of around two-and-a-half to three times. Simply put, to buy ₹1 crore worth of a gold ETF, an investor would need to invest ₹30 lakh, while the broker would finance the remaining amount in exchange for interest of around 9-18% per annum, Nanda added.
Personal finance expert Amol Joshi, founder of PlanRupee Investment Services, said that the idea behind diversification was to derive risk-adjusted returns. He recommends an allocation of 10-15% to precious metals, of which gold should comprise two-thirds and silver the rest.
"Investors have increased allocation to precious metals from a historical 5% to 10-15% of their financial portfolios over the past year or so because of the phenomenal returns generated by precious metals relative to equities. We expect gold to outperform silver over the long term," Joshi said.
GoldBees, for instance, generated absolute returns of 79% over the past one year to ₹128.7 a unit as on 11 February. Against this, Nifty 50 has risen 12.5% to 25,953.85 points over the same period. The absolute return from SilverBees is a whopping 171% at ₹247.37 a unit over the same period, but it has scarred investors recently as the metal tends to be more volatile than gold.
For instance, as of 11 February, it was down 31% from its record high of ₹360 on 29 January. GoldBees was down 13% from its record high of ₹148.14 over the same period. Both the metals have cooled off from their highs on abating tensions between Iran and the US and a stronger dollar.
There were 25 gold ETFs and 17 silver ETFs in India as of January end, according to the Association of Mutual Funds in India.
Investor interest in margin trade funding for bullion coincides with mutual fund investors’ record ₹33,503 crore of net inflows into gold and silver ETFs in January, surpassing equity MF inflows of ₹24,028.59 crore during the month. Of this, gold ETFs accounted for ₹24,039.96 crore, with silver making up the remainder.