Trade and commerce have played a key role in shaping our lives, with commodities enabling trade to take place since centuries. While a majority of the population doesn’t directly participate in commodity trade, we are all partners in it, albeit indirectly. Commodity Funds provide investors an ideal opportunity to participate in the trade of commodities, helping them meet certain financial goals.
What are Commodity Funds?
A commodity is a product or substance which can be traded for another product, typically similar in nature. It is a type of good which is exchanged with other goods, thereby playing a key role in overall trade. Some of popular commodities include coffee, tea, gold, food grains, metals, etc. A commodity fund is a fund which primarily invests in commodities, offering returns to investors based on the market performance of the commodity chosen.
For example, a mutual fund company might offer a commodity fund which deals only in gold, with fluctuations in gold prices having a direct impact on the fund and the returns it offers.
Type of Commodity Funds:
There are a number of commodities which are actively traded globally, thereby giving rise to commodity funds which span a diverse spectrum. Some of the most common types of commodity funds are mentioned below.
- Natural resource funds – These are funds which invest in companies/organisations which have access to natural commodities. The most popular ones are gold, silver, oil, etc. Technological developments have led to investment in renewable energy sources like wind energy as well.
- Basic/true commodity fund – This fund predominantly invests in physical assets, like metals.
- Futures – Commodity futures are a very popular option among investors, with physical delivery of the commodity possible only at a predetermined date. These are typically riskier on account of fluctuations in rates, with it possible to lose money if prices fall.
- Index funds – This is a fund which is pitted against a standard market index, with the MF aiming to match or keep pace with market trends.
- Combination fund – This is a fund which is a mix of the basic commodity fund and commodity futures.
Features of Commodity Funds:
Some of the key features of commodity funds are mentioned below.
- Flexible – Commodity futures can be used to meet both short-term and long-term investment goals, with investors having an option based on their requirements.
- Multiple options – Commodity funds can invest in different commodities, helping investors meet their investment criteria. One can choose a fund based on his/her preference, with funds catering to different requirements.
- Hedge against inflation – Most commodity funds work as a hedge against inflation, offering returns which are on par with global changes.
- Protection against market fluctuation – Certain commodity funds (gold, silver) offer protection against market fluctuations. These commodities perform inversely when compared to the market, thereby providing high returns even if markets collapse or underperform, helping investors mitigate risks.
- Risk – The risk associated with commodity funds varies, with certain funds overcoming market risks thanks to their nature. These funds are typically not high-risk, making them ideal for amateur investors. Certain investments could be prone to risks associated with a particular country. For example, a fund with investment in oil can face issues if there are global sanctions or political problems in the country which owns the oil reserves.
- Rate fluctuation – The returns offered by a commodity fund might fluctuate with changes in the price of a commodity. This is especially true if the commodity supply or demand is hampered, with the performance varying proportionally.
- Diversification of portfolio – A commodity fund helps investors diversify their portfolio, thereby reducing risk associated due to stagnant portfolios.
- Strategic – Most commodity funds are managed by managers who are aware about market conditions, being experts in their own rights. Strategic investment on their part could help investors increase their wealth.
- Stagnation – There is a possibility for commodity funds to stagnate if there is lack of demand from the market. This could result in lean returns, with other options seeming more attractive.
- Indirect – Investing in a commodity fund reduces the direct involvement of an investor in the market, helping them concentrate on other aspects.
Who should invest in Commodity Funds?
Trading in commodities requires knowledge about the product and the market, with novices capable of making mistakes which can cost them a lot of money. Individuals who lack this knowledge can opt for commodity funds, which are typically managed by expert fund managers. In addition, commodity funds vary according to the market and are subject to fluctuations, making them a risky option at times. Investors who do not mind taking this risk could consider investing in them.
Returns on these funds can vary, with no fixed guarantee provided by fund managers. This makes commodity funds unsuited for individuals looking for either fixed returns or guaranteed growth of an investment. Additionally, the term of a particular fund might not be able to generate the returns expected by investors (owing to market conditions), thereby making this product unsuitable for individuals looking to get returns within a specific period.
These factors, when combined, make commodity funds a sensible investment for individuals who are not averse to taking risks and those who do not have a specific time period in mind to get returns. Additionally, patience can be an added virtue while investing in them, thereby making these funds ideal for individuals who have sufficient wealth and are looking to diversify their portfolio.
Popular Commodity Funds in India:
A number of companies offer commodity funds in the country, with the popular ones mentioned below.
- Axis Gold Fund
- Invesco India Gold Fund
- Reliance Gold Savings Fund
- Birla Sun Life Gold Fund
- Canara Robeco Gold saving Fund
- ICICI Prudential Regular Gold Savings Fund
- SBI Gold Fund
- IDBI Gold Fund
- HDFC Gold Fund
- Kotak Gold Fund
Note: The funds mentioned above have been categorised as popular based on their subscription. These might not necessarily be the best funds, with the numbering done randomly.
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.