Silver ETF vs Silver FoF: What Indian Investors Should Know Before Investing
- 21st January 2026
- 03:20 PM
- 9 min read
In the wake of silver’s historic rally, which delivered over 160% returns in 2025, Indian investors are increasingly looking to add the metal to their portfolios. However, the choice between a Silver ETF and a Silver FoF often confuses even seasoned investors. While both products track domestic silver prices, they differ significantly in cost, liquidity, and tax treatment. This guide explains those differences to help investors make an informed choice.
What Is a Silver ETF?
A Silver Exchange Traded Fund (ETF) is a passive investment scheme that trades on stock exchanges (NSE/BSE) just like a company stock. As per SEBI regulations, Silver ETFs must invest at least 95% of their net assets in physical silver bars (99.9% purity) or silver-related instruments.
How a Silver ETF Works?
When you buy a unit of a Silver ETF, you are essentially buying a digital certificate backed by physical silver kept in secure vaults by the fund house. The price of one unit typically corresponds to a specific quantity of silver (e.g., 1 gram or 0.5 grams).
- Trading: Units can be bought and sold on the stock exchange during market hours (9:15 AM to 3:30 PM).
- Pricing: Prices fluctuate throughout the trading session in line with market demand and prevailing silver prices.
- Requirement: A Demat and trading account is mandatory.
What Is a Silver Fund of Funds (FoF)?
A Silver Fund of Funds (FoF) is a mutual fund scheme that invests its corpus into a Silver ETF. It does not buy physical silver directly. Instead, it buys units of the underlying Silver ETF managed by the same or a different fund house.
How does a Silver FoF (Funds of Funds) Work?
A Silver Fund of Funds (FoF) invests in one or more Silver ETFs instead of buying physical silver directly. When you invest in a Silver FoF, the fund manager uses your money to purchase units of a Silver ETF on your behalf.
This structure allows investors to gain exposure to silver prices through a mutual fund without needing a Demat account.
- Trading: Units are bought and sold at the end-of-day Net Asset Value (NAV), similar to other mutual funds.
- Pricing: The NAV is calculated and published once each day after market hours.
- Requirement: No Demat account is required. Investments can be made through mutual fund platforms or distributors.
Key Differences Between Silver ETF and Silver FoF
The comparison between Silver ETFs and Silver FoFs boils down to convenience versus cost. Here is a side-by-side comparison.
| Feature | Silver ETF | Silver FoF |
| Structure | Listed Security (traded on exchanges) | Mutual Fund Scheme |
| Demat Account | Mandatory | Not Required |
| Pricing | Real-time during market hours | End-of-day NAV |
| Expense Ratio (TER) | Lower; typically, ~0.40%–0.56% | Higher; typically, ~0.60%–1.00% |
| Transaction Cost | Brokerage, STT, and exchange charges | Nil for direct plans |
| SIP Facility | Limited; manual or broker-dependent | Easy; automated |
| Liquidity | High; depends on market volumes | High; redemption with AMC |
| Minimum Investment | Price of one unit (e.g., ₹70-₹100) | Typically, ₹100-₹500 |
Cost Analysis: Expense Ratio and Tracking Error
Cost is a major differentiator. Since a FoF invests in an ETF, it technically has a two-layer cost structure, although SEBI caps the total expense ratio.
Expense Ratio (TER)
- Silver ETF:Generally lower. As of January 2026, typical expense ratios range from 0.40% to 0.56%.
- Silver FoF:Generally higher. The FoF charges its own management fee and also bears the expense ratio of the underlying ETF. The total cost to you is usually 0.60% to 1.0% for regular plans. Direct plans are cheaper but still often slightly costlier than holding the ETF directly.
Tracking Error
Tracking error measures how closely the fund follows the actual price of silver.
- ETFs:May have tracking error due to cash holdings (for redemption) and expense ratios.
- FoFs: Inherit the tracking error of the underlying ETF, along with a slight cash drag due to cash holdings for daily redemptions.
Taxation Rules
Understanding taxation is crucial, especially after the changes in the Finance Act 2024 (effective July 2024). The tax treatment for Silver ETF vs Silver FoF differs slightly based on the holding period definition for listed vs. unlisted securities.
- Short-Term Capital Gains (STCG)
- Silver ETF: If sold within 12 months.
- Silver FoF: If sold within 24 months.
- Tax Rate: Added to your taxable income and taxed at your slab rate (e.g., 30% + cess for highest bracket).
- Long-Term Capital Gains (LTCG)
- Silver ETF: If held for more than 12 months.
- Silver FoF: If held for more than 24 months.
- Tax Rate: 12.5% (plus surcharge and cess).
Note: The benefit of indexation (adjusting purchase price for inflation) was removed in the July 2024 budget. Both now attract a flat 12.5% rate for LTCG.
Important Distinction: Silver ETFs qualify as long-term investments faster, after 12 months, while Silver FoFs require a 24-month holding period. As a result, if you plan to exit between 12 and 24 months, Silver ETFs are materially more tax-efficient, as gains are taxed at 12.5% compared with slab-rate taxation for FoFs.
Liquidity and Trading Risks
Liquidity Risks in Silver ETFs
While ETFs trade like stocks, their liquidity depends on market participants. In December 2025, during high volatility, some Silver ETFs saw intraday swings of up to 19%, with prices deviating from the fair value (NAV). If you try to sell during such panic, you might sell at a discount.
The FoF Advantage
FoFs do not have this problem. You buy and sell directly with the fund house at the day’s NAV. You don’t need to worry about bid-ask spreads or lack of buyers on the exchange. However, settlement takes longer (usually T+2 or T+3 days) compared to the T+1 settlement for ETFs.
Who Should Invest in Silver ETF or Silver FoF?
| Investor Profile | Recommended Product | Why? |
| Active Trader | Silver ETF | Real-time pricing, lower cost, faster LTCG (12 months). |
| SIP Investor | Silver FoF | Automated investing, no Demat needed, rupee-cost averaging. |
| Small Saver | Silver FoF | Start with as little as ₹100; no brokerage charges. |
| HNI Large Corpus | Silver ETF | Lower expense ratio saves significant money on large amounts. |
How to invest in Silver?
Follow this roadmap to integrate silver into your portfolio:
Step 1: Assess Allocation
Review your existing portfolio. If you currently have no exposure to precious metals, consider a target allocation of 5–10%. Avoid allocating capital solely based on recent price rallies.
Step 2: Choose the Right Vehicle
Investors with a Demat account may consider liquid Silver ETFs with lower tracking error. Those seeking systematic investments can opt for monthly SIPs through a Silver FoF offered by select fund houses.
Step 3: Start Gradually
Deploy a portion of the intended capital initially and stagger investments over time, given silver’s price volatility.
Step 4: Review Periodically
Monitor performance relative to silver prices. If tracking error remains consistently high (above 1%), reassess the chosen fund.
Key Takeaways
- Structure: Silver ETFs are exchange-traded; Silver FoFs are mutual funds investing in those ETFs.
- Cost: ETFs are generally cheaper (TER ~0.5%) than FoFs (TER ~0.6-1.0%).
- Taxation: ETFs qualify for 12.5% LTCG tax after just 12 months; FoFs require 24 months.
- Convenience: FoFs are best for SIPs and investors without Demat accounts.
- Performance: Both track silver prices, but FoFs may lag slightly due to higher fees and cash drag.
Conclusion
Choosing between a Silver ETF and a Silver FoF depends on your investment style, not the asset itself. If you want cost efficiency and tax benefits after one year, the ETF may be more suitable. If you prioritize disciplined SIPs and simplicity, the FoF is your best bet. Regardless of the route, ensure silver remains a diversification tool rather than a speculative bet.
Ready to start your silver investment journey? Open your PL Capital account and access top-rated Silver ETFs today.
FAQs on Silver ETF vs Silver FoF
What is the minimum investment for Silver ETFs vs FoFs?
For Silver ETFs, the minimum is the price of one unit on the exchange, which typically ranges from ₹70 to ₹100 depending on the fund and market price. For Silver FoFs, you can start a SIP with as little as ₹100 or a lump sum of ₹500, varying by fund house.
Do I need a Demat account for Silver FoFs?
No, you do not need a Demat account for Silver Fund of Funds (FoFs). You can invest in them just like any regular mutual fund through an AMC website, an aggregator app, or a distributor. A Demat account is mandatory only for Silver ETFs.
Which is more tax-efficient, Silver ETF or FoF?
Silver ETFs are generally more tax-efficient for medium-term holding. They qualify for Long-Term Capital Gains (LTCG) tax of 12.5% after a holding period of just 12 months. Silver FoFs require a holding period of 24 months to qualify for the same 12.5% LTCG rate.
Can I do a SIP in a Silver ETF?
Technically yes, but it is difficult. Most brokers do not offer automated SIPs for ETFs; you have to manually buy units every month. Some brokers offer “Stock SIP” features, but they are not as seamless as mutual fund SIPs. Silver FoFs are designed specifically for easy, automated SIPs.
Why do Silver FoFs have higher expense ratios?
Silver FoFs have a higher expense ratio because they have a dual fee structure. You pay the management fee for the FoF scheme itself, plus you indirectly bear the expense ratio of the underlying Silver ETF that the FoF invests in. SEBI limits the total, but it is usually higher than a direct ETF.
