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Kotak Mutual Fund did something unfashionable for a bull market: it told investors to hold their chequebooks. On October 10, it paused lumpsum and switch-in subscriptions to its Kotak Silver ETF Fund of Fund (FoF). Systematic investment plans and redemptions continue; the underlying Kotak Silver ETF, being listed, keeps trading. The halt is not a loss of faith in silver. It is a refusal to buy at bad prices.
The culprit is a wedge that has opened between India’s domestic spot price of silver and its import-parity level (the global price translated into rupees and adjusted for duties and costs). Through September, that premium crept from 0.5 per cent (September 4) to 2 per cent (September 30). In October, it blew out: 3.4 per cent (October 8) and 5.7 per cent at the close on October 9, after an intraday spike to around 12 per cent. In today’s market, Kotak reckons, buyers are facing 10 per cent “buying” premium while sellers fetch only 3 per cent over parity – a sign of thin liquidity and a fat spread.
Such dislocations have prosaic causes. When global prices sprint, local inventories thin, delivery timelines lengthen, and shorts scramble to cover. Arbitrage should compress the gap: authorised participants can import metal and create ETF units. But creation lags when physical supply is tight, logistics snarl or risk capital is scarce. Until metal flows, listed prices levitate above fundamentals and funds that must deploy large lumpsums risk locking in the overpayment – a permanent cost for a transient kink.
Hence the pause. A FoF has the luxury of gating new cheques while honouring redemptions and letting SIPs plod on, smoothing entry points. An ETF cannot suspend trading without inviting havoc. Kotak’s move is therefore plumbing, not prophecy: it protects newcomers from buying scarcity, and existing holders from tracking error, while leaving the long-term thesis intact. The firm says subscriptions will resume when the premium normalises; it remains constructively bullish on silver.
The backdrop encourages such conviction. Silver’s demand is increasingly industrial – solar, batteries, electronics – even as mine supply has lagged. Global prices have flirted with psychologically charged levels, stoking speculation and occasional short squeezes. That cocktail produces precisely the kind of two-day, double-digit domestic premium India just witnessed.
What should investors do? The boring thing. Keep SIPs; avoid paying premia you cannot recover. Premium spikes tend not to last; the price you paid does. Kotak’s message is resolutely unexciting: in markets, as in policy, the most patient trade is often the most prudent.
Also read: Silver is outshining gold. Is it the smarter investment?
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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