Commodity Mutual FundsWhen it comes to creating a diversified mutual fund portfolio, most investors ignore commodity mutual funds. They tend to focus only on equity, debt and hybrid mutual funds. Commodity funds are often considered too risky. However, they are the best way of creating a diversified mutual fund portfolio. The investors who are seeking to diversify their portfolio across various asset classes might have missed commodity funds. So, let us explore how commodity mutual funds can be a suitable option for you! But before you invest in commodity mutual funds, let us understand - the meaning and types of commodity mutual funds in India. In this article:
- What are Commodity Mutual Funds?
- Types of Commodity Mutual Funds
- Why should you invest in Commodity Funds?
What are Commodity Mutual Funds?Before we understand ‘commodity mutual funds’, you first need to understand, ‘what are commodities’? Commodities are goods and services which can be traded like coffee, food grains, gold, silver, eggs etc. A Commodity Mutual Fund is a mutual fund that invests in a particular commodity as per the fund’s investment objective. Commodity mutual funds are professionally managed by experts and help investors indirectly participate in the commodities market.
What are the types of Commodity Mutual Funds?Commodity Mutual Funds have various types depending on the underlying commodity that the fund invests in. 1. Natural Resource Funds The natural resource funds invest the corpus in the companies which have a business associated with natural resources including metals and food. Example: Food Grains, minerals, petroleum, oil, gold, etc. The performance of these funds is dependent on the price fluctuation of the commodities with which the business is associated. 2. Basic or True Commodity Funds Basic or true commodity funds are called “basic” because the commodities are directly mined from the core of the earth. Example: Precious metals like Gold, Silver, etc. 3. Future Funds Future Funds are considered as the riskiest commodity mutual funds as the fund manager takes a call on future trading and the NAV of future funds can depreciate sharply but can also deliver significant gains. 4. Combination Funds As the name suggests, combination funds follow a combined strategy of investing in basic commodities and commodity futures. The commodity future possesses high risk while the basic commodities control the volatility. 5. Index Funds Index commodity mutual funds are passively managed mutual funds in which the investments are directly used to buy the commodity as per the standard rates based on the benchmark.
Why should you invest in Commodity Mutual Funds?While trading in commodities, you certainly need some extra knowledge of the different types of commodities. As an individual trader or an investor, it is a tedious task to have extensive knowledge about a commodity. This is where commodity mutual funds came into existence. Investors who lack this knowledge can invest in commodity mutual funds with ease. Further, these funds vary as per the fluctuations in the global market. Hence, while investing, you should consider these funds only if the risks are within their tolerance limits. Also, commodity funds are a great investment option for investors with higher risk tolerance and a long-term investment horizon. Now, let’s look at few benefits of commodity mutual funds. 1. Diversification Investing in commodity funds diversifies your investment portfolio. Also, as the stock market and the commodities markets are negatively correlated it helps in hedging as well. 2. Valuable Investments and Protection Against Volatility Commodities like silver and gold are known as a hedge against inflation. Hence, they are not prone to equity market trends. They also provide good returns even when the equity markets are down. 3. Protection against inflation The commodity funds tend to provide returns as per the global markets. Considering this, we can say that it is a great way to hedge against inflation. 4. Professional Management Professional management helps in better investment decisions that are made by market experts. Also, these markets experts have first-hand knowledge of the markets and explore the best commodities to invest in at the right price and right time. 5. Flexibility in investments Commodity Mutual funds offer a wide range of options which helps investors meet their financial goals easily. Also, with the help of these varied investment options, you can have a diversified investment with ease which reduces your risk substantially. 6. Risk The commodity funds are associated with varied types of risks.
- Geopolitical tensions
- Market performance depending on the commodities
- The Global market fluctuations