Silver Rush: Festival Demand Messing With AMCs & Investors
Explaining the phenomenon, Satish Dondapati, fund manager ETF at Kotak Asset Management Company (AMC), said that the demand is so huge that they’re unable to bring in the physical silver that’s needed for these exchange traded funds (ETFs).
The Gist
- Investor demand for silver ETFs surged, leading Kotak Mutual Fund to suspend new subscriptions.
- Physical silver availability is limited, causing ETF prices to trade at a premium of 10-12%.
- The demand spike coincides with festive seasons, further straining silver supply in the market.
As gold prices rose to astronomical heights, silver seems to have become the new safe haven asset that most investors are chasing. It has triggered a silver rush so intense that Kotak Mutual Fund temporarily suspended lump sum and switch-in subscriptions in its silver ETF Fund of Fund (FoF) as on October 9. Axis Mutual Fund and Tata Silver also did the same with their ETF FoFs on October 13. They are unusual moves as funds rarely cancel inflows.
Explaining the phenomenon, Satish Dondapati, fund manager ETF at Kotak Asset Management Company (AMC), said on The Core Report that the demand is so huge that they’re unable to bring in the physical silver that’s needed for these exchange traded funds (ETFs).
Silver ETFs are backed by physical silver. Ideally, the AMC which issues ETFs has to provide physical silver on the very same day to the exchange, or store it in the vault. This delivery is necessary for the silver units to be created on the demat account of the buyer.
Last month, silver ETF demand zoomed to as much as Rs 6,416 crore, which is thrice the inflow seen in August at Rs 2,180 crore, as per data from the Association of Mutual Funds in India (AMFI).
ETF Demand Vs Physical Silver
On the other hand, physical silver liquidity has been low. “Normally, the market makers or the bullion dealers provide liquidity on exchange. They supply units to investors who come to buy on exchange. There has been a shortage of physical silver in the spot market, and the investment demand is high. That's why the exchange price of silver ETFs has traded at a premium of around 10-12% last week,” said Dondapati.
The dynamics in the silver market have changed at a swift pace in the last few weeks. An Axis Mutual Fund note on October 11 said that the premium of Indian domestic silver prices over global silver surged from 0.5% in early September to as much as 5.7% as of close on October 9. Intra-day spikes were as much as 12%.
This premium enters at the physical market level and flows through to ETFs or FoFs. Normally, any gap between Indian and global prices would be small and arbitraged away as ETF authorised participants can swap silver for units and vice versa.
“But in the current scenario, with physical silver scarce, the premium persisted, and even ETF arbitrageurs could not immediately bridge the difference,” said the Axis Mutual Fund report.
Dhanteras, Diwali & Weddings
Physical silver demand is highest during festivals like Dhanteras and Diwali. It coincides with the wedding season, which increases demand. Jewellers are holding onto their wares to prepare for the demand.
“Buyers have flocked to purchase silver – coins, bars, jewellery, idols. In fact, India’s silver imports nearly doubled in September compared to last year, as bullion dealers and jewellers scrambled to secure inventory despite record-high prices. This has exacerbated a short-term scarcity in the domestic market,” said Axis Mutual Fund.
Bullion Bull Run & Strategic Allocation
The year of 2025 saw a broad bullion bull run, but silver prices went up by 53% year-to-date, outperforming gold. Investors are expecting silver to see the same sharp run that gold has seen in the last three years.
“People are expecting silver prices will also catch up to that level, proportionately. Silver has a dual advantage. It acts as a safe haven and also has a huge industrial demand. Since gold appreciated over $4,000/ounce, people think that it has already appreciated. Silver is the next best choice, since the denomination is lower, like it is approximately 1.5% of the silver value, currently,” explains Dondapati.
Moreover, around 70% of the demand for silver comes from industry, especially new-age industries like green energy, solar panels, semiconductors, and electronics, adding to the fundamentals around silver.
‘Premiums Will Wash-Out’
While it has given spectacular returns as of now, silver has been named as the ‘devil’s metal’ due to extreme volatility in prices. Trading in silver can pose speculative risks, and has sunk in money of many investors during rapid price declines as seen in the 1980s.
“In a hurry, most of the investors normally see that if a silver price goes up as a FOMO (Fear Of Missing Out) thing, people get invested, they will not see what the price is. To protect the investor interest, we are also educating people that this is not a right price, it is trading at a premium and because of supply concern,” said Dondapati.
Yet, the white metal has caught the imagination of the investors, especially this year. In January, inflows were at Rs 367 crore per month, which crossed Rs 2,000 crore in June, and tripled from there in September.
Investors must be aware of the dangers, warn experts. For example, the current premiums seen in the market might not last. As and when the physical supply catches up with the demand, the premiums will ‘wash out’.
Arihant Bardia, chief investment officer and founder of Valtrust said, "Silver ETFs are trading at unusually high premiums due to a supply shortage in India. Extra cost has risen to ₹15k–₹20k over market price. Net asset value (NAV) now reflects this premium. Investors should ideally pause all lump sum investments in silver funds temporarily, while systematic investment plans (SIP)/ systematic transfer plans (STP) can continue as usual.”
This, however, is only for short-term investors; for investors with a multi-year horizon, it will continue to remain a hedge for those looking to diversify.
