'Investors would be overpaying 10% for silver, if...': Nilesh Shah after Kotak AMC halts new investments in FoF

Kotak Mutual Fund has announced a temporary suspension of lumpsum and switch-in subscriptions in its Kotak Silver ETF Fund of Fund (FoF), effective October 10, following an unusual surge in domestic silver prices that have drifted sharply above global levels. The move, the fund house said, is intended to protect investors from paying inflated premiums caused by an acute shortage in India’s physical silver market.

Kotak Mutual Fund stated, “Lumpsum and switch-in investments in Kotak Silver ETF Fund of Fund will be temporarily suspended. Subscriptions will resume once the premium normalizes to acceptable levels. Existing SIPs and STPs will continue as usual.”

According to Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company (AMC), the decision was driven purely by investor interest. “Keeping in mind the high spot premium for silver over the import parity price, Kotak MF is suspending lumpsum subscriptions. SIPs and redemptions will continue as before. The Kotak Silver ETF, being a listed fund, will remain open for trading,” Shah said on social media platform X.

Why Kotak paused subscriptions

Shah, in an interview with Business Standard, explained that the price distortion between international and domestic silver rates had reached abnormal levels. “The Kotak Silver ETF price is linked to global silver prices converted into rupees, plus import duty and GST,” he noted. For example, if silver trades at $50 per ounce, converted at Rs 90 per dollar, the landed cost is around Rs 4,500. Adding 7% import duty and GST brings the fair value to roughly Rs 5,000 per ounce.

However, due to a scarcity of physical silver — possibly from shipment delays, short covering, or festive demand — domestic dealers were quoting Rs 5,500 per ounce, representing a 10% premium over the fair import parity price. “Normally, premiums are just 0.5%. But this week, it shot up to 12% intraday. If investors buy our Silver ETF now, they’d effectively pay Rs5,500 for something worth Rs 5,000 — that’s not fair,” Shah said. “Hence, we decided to pause inflows to protect investor interests.”

Redemption pressure

Shah ruled out redemption pressure, clarifying that the fund of fund invests only in silver ETFs, not silver futures, and hence cannot hedge such market distortions. “If investors want silver exposure, they can buy ETFs directly or through futures, which are currently cheaper. Our move is purely protective — and I expect other fund houses to take similar steps,” he said.

While the silver shortage is temporary, Shah expects it to normalise soon. “Commodities always find equilibrium. Just like in the 1980s when silver spiked to $50 an ounce and people started melting utensils, supply eventually caught up. This is a short-term aberration,” he added.

Broader market

Discussing the ongoing rally in gold and silver, Shah said that prices have been rising since 2022 when Western nations froze Russia’s forex reserves, prompting central banks worldwide to accumulate gold as a store of value. “Silver, the poor man’s gold, followed suit — aided by industrial demand and even rumors of central bank purchases,” he said.

Shah believes that while both gold and silver remain attractive long-term assets, investors should maintain a balanced allocation. “Gold and silver together shouldn’t exceed 10–12% of a portfolio. We remain bullish, but don’t expect last year’s explosive returns. There will be corrections,” he cautioned.

On equities, Shah was optimistic. “Last year, equities were riskier; this year, they offer better value. With improving earnings and potential trade deals, returns could be in the high single to low double digits,” he said.