Commodity Mutual Funds – Types and Benefits of Commodity Funds
Of the various asset classes like equity, debt, gold, real estate, etc., investing in commodities is not so common among Indian investors. While most investors seek to diversify their investment portfolios across various asset classes, commodities were somehow left behind. Here, we will talk about Commodity mutual funds, their types and why you should invest in them.
What are Commodity Funds?
Before we look at commodities funds, let’s understand commodities:
‘A commodity is a good which is traded for another good of a similar value. There are various commodities that are traded every day like gold, petroleum products, coffee, food grains, etc. These are traded either for their demand by consumers or their commercial value. The trade of the commodities is governed by their market demand and prices.’
Having understood commodities, let’s look at commodity funds:
A Commodity Fund is a mutual fund that invests in the trade of a particular commodity. This allows the investors an opportunity to earn returns on their investments.
Types of Commodity Funds
Around the world, there are hundreds of commodities which are actively traded every day. Therefore, to facilitate trade and investment, they are categorized as follows:
Basic/True Commodity Funds
Commodity mutual funds in India predominantly invest in naturally occurring physical assets like metals.
Natural Resources Funds
These funds primarily invest in organizations or companies which deal with natural resources like petroleum, oil, minerals, gold, etc.
Future Funds
Future funds are the riskiest commodity funds. The fund manager of a future fund takes a call on future trading of the commodity. The NAV of these funds can rise or fall dramatically based on the call made by the fund manager.
Combination Funds
Combination funds follow a combined strategy of investing in basic commodities and commodity futures. The futures offer a chance to earn good returns while the basic commodity investing helps to bring down the volatility.
Index Funds
These funds are passively managed. In these funds, the fund manager uses the corpus to buy a commodity at the standard rates based on the benchmark.
Why should you invest in Commodity Mutual Funds?
Investors have started warming up to investing in commodity funds at a rapid pace. These funds offer some great features and benefits make them attractive to investors. However, one must consider the risks too.
Portfolio Diversification
All investors seek to diversify their portfolio across different asset class and also with each asset class. Investing in commodity mutual funds can add an extra element of diversification to your investment portfolio.
Protection against market fluctuations
Unlike most other commodities, the prices of some commodities like gold and silver are not driven by market trends. Hence, they tend to offer good returns regardless of the performance of the market.
The Fund manager Advantage
Commodity Funds in India are helmed by expert fund managers who have extensive knowledge about commodities and their markets. This gives you a strategic advantage over others.
Inflation Protection
Usually, commodity mutual funds tend to offer returns at par with the global market adjustments. Therefore, the act as a good hedge against inflation.
Tenure agnostic
As an investor, you can use commodity funds to meet your long-term as well as short-term goals.
Spoil for choice
Commodity funds offer a wide array of options helping investors meet their financial goals.
Risks
Macroeconomic, political, social and other factors determine the performance of a commodity. Hence, these funds have such risks associated with them.
Remember, as an investor, you need to have a thorough understanding of commodities before investing in commodity funds in India. The NAV of these funds can vary with slight market fluctuations. Therefore, there are no guaranteed returns. It is recommended to analyze the risks involved before making investment decisions.
Who should invest in Commodity Funds?
Commodity trading requires extensive knowledge about the commodity and the markets as well. Investors who lack this knowledge can opt for commodity mutual funds. Further, these funds vary as per the fluctuations in the market. Hence, you should consider investing in these funds if the risks are within your tolerance limits. Since commodity funds have no guaranteed returns, they are not suited for investors seeking fixed returns or assured growth.
Therefore, commodity funds are best-suited to investors with higher risk tolerance and a long-term investment horizon.
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