Commodity Mutual Funds

Commodity mutual funds are among the instruments that have yet to gain popularity in the Indian investment market but they are filled with potential. Investing in commodity funds can diversify your portfolio, and pave the way for reduced volatility.  

Past records show a low correlation between debt and equity markets in many portfolios, but these funds can help bridge the gap. Read on to learn about commodity-based mutual funds, their types, advantages, and more.

Commodity funds are a category of mutual funds that make investments across a wide spectrum of commodities. It encompasses agricultural commodities like coffee, food grains, etc. It also invests in non-agricultural commodities such as minerals, gold, crude oil, etc. 

Typically, commodity mutual funds in India are structured similarly to Funds of Funds (FOFs) and Exchange-Traded Funds (ETFs). At least 95% of assets in these funds are allocated in physical commodities or commodity ETFs.

Check out various types of commodity mutual funds that you can invest in.  

1. Natural Resources Funds

These commodity funds primarily allocate their investments to companies and organisations engaged in natural resources, including minerals, oil, and petroleum.

2. True/Basic Commodity Funds

These commodity funds predominantly focus on investing in naturally occurring physical assets, such as metals. These assets are finite but often fuel innovation. As such, there is always potential for profit with such funds.  

3. Index Funds

A commodity index fund is managed passively and involves the fund manager purchasing commodities from the corpus at standard prices aligned with the benchmark index.

4. Future Funds

In future funds, the fund manager takes decisions on the future trading of commodities, based on the potential fluctuations in the Net Asset Value (NAV). Generally, these funds are reserved for skilled investors or those with a larger appetite for risk. 

5. Combination Funds

These commodity funds adopt a strategic approach by investing in both basic commodities and commodity futures. This combination aims to minimise volatility while providing good returns. It provides balance to investors venturing into such funds.

Investing in commodity mutual funds is a great way to explore other asset classes. As such, it simplifies diversification but there are other upsides, too. 

1. Safeguards Against Market Volatility

Certain commodities like gold and silver hold significant value when the market is bearish. Therefore, investing in these commodities can protect you against these upward and downward market movements.

2. Helps in Portfolio Diversification

By investing in commodity mutual funds, you can diversify your investment portfolio to mitigate risks and achieve consistent growth, regardless of market conditions. Including a commodity fund in your portfolio also helps secure your wealth, especially if you choose assets like gold and silver. 

3. Hedge Against Inflation

In case of high inflation and global market fluctuations, commodity mutual funds serve as a safeguard. Making investments in these commodities can help you adjust for inflation and other situations where market volatility arises.

4. Provides Flexibility

You can take advantage of the flexibility of commodity mutual funds to align your investments with both long-term and short-term financial goals. This is because commodity funds serve as a versatile choice, and you can choose a fund that covers both aspects with ease. 

5. Planned Investment Options

Professional fund managers with expert knowledge in navigating the market manage these commodity mutual funds. This makes it easier to assess various options and even choose one based on the manager's investing principles.

 

If you are interested in investing in commodities in India, then commodity mutual funds can be a smart option. They provide a relatively safer avenue to participate in the dynamic commodities market without requiring extensive prior knowledge. 

Remember, commodity funds are best suited for you if you possess a higher risk tolerance and have a long-term investment horizon. You can consider comparing them against other types such as debt funds, liquid fund, and thematic funds among others so that you can make an informed decision.

Choosing the right tenor and commodity type is crucial when investing in commodity mutual funds. It is essential to have comprehensive knowledge of commodities. Hence, if you have done the required research and have a grasp of the macroeconomic factors that affect it, you can invest in these funds. 

 

Furthermore, these are considered high-risk investments as they are affected by market trends. So, it is ideal for investors that have an appetite for risk. Moreover, it is better suited for investors that have a lengthy investment horizon, as these funds aren’t optimal for short-term returns.