What are Commodity Mutual Funds?

Did you know that you can invest in commodities and earn returns, just like you can invest in asset classes such as shares, bonds, and real estate? Yes, it is possible via Commodity Mutual Funds. And it is a good investment avenue when it comes to diversifying your portfolio.

What are commodity funds?

As the name suggests, Commodity Funds primarily invest in commodities like gold, silver, and essential natural resources. These funds offer the opportunity to participate in the commodity markets and potentially earn returns based on price movements.

Types of Commodity Funds

After understanding what a Commodity Mutual Fund is, there are various types of such funds for you to invest in –

Basic / True Commodity Funds: These Mutual Funds invest in natural physical commodities, such as gold, silver, metals, etc. Some commodity funds also invest in stocks of companies that are involved in commodity and commodity related sectors.
Natural Resource Funds: These Mutual Funds invest in companies that are involved in the extraction and trade of natural resources, such as oil, petroleum, diamonds, minerals, etc. In India, such funds are primarily available in fund of funds structure.
Index Funds and ETFs: These Mutual Funds track a specific commodity index and buy commodities as per the composition in the index.

Reasons to invest in Commodity Mutual Funds

Portfolio diversification: Since the performance of a Commodity Mutual Fund is not related or linked to the performance of the equity and debt markets, they can help offset losses in the conventional financial markets and reduce volatility in your portfolio.
Protection against market fluctuations: Commodities like silver and gold act as a safer avenue to invest in compared to equities. Even in the case of a volatile market, their prices do not vary much, thereby protecting your portfolio against market fluctuations.
Inflation protection: As inflation rises, so do the prices of commodities. Therefore, they respond positively to the global inflationary pressures. Thus, investing in Commodity Funds will act as a hedge against the rising inflation.
Expert fund management: Commodity Funds are managed by expert fund managers who make all the decisions relating to the management and administration of your investments. You will be able to benefit from their knowledge and experience by investing in Commodity Funds.
Diverse investment options: Commodity Funds provide you with multiple investment options, allowing you to select the commodity market that aligns with your investment goals.

Who should invest in Commodity Funds?

If you are looking to diversify your portfolio beyond traditional asset classes, you may find Commodity Funds attractive. Commodities often have low or negative correlations with other asset classes, which can help reduce overall portfolio risk.
If you are concerned about inflation eroding the value of your money, you can invest in Commodity Funds to preserve purchasing power.
If you have a good understanding of market dynamics and know the factors that affect commodity prices, you can benefit from Commodity Funds.
You might want exposure to particular economic trends or cycles, such as a boom in emerging markets, technological advancements affecting energy consumption, or increased demand for precious metals. Commodity Funds can provide targeted exposure to such markets.
If you have a long-term investment goal, you can allocate a portion of your portfolio to Commodity Funds as part of your overall plan and benefit from the potential for high returns and diversification.

Factors to consider when investing in Commodity Funds

Risk assessment: You need to consider your risk appetite and investment goals carefully before you invest in Commodity Funds. Some commodities are volatile in nature and the level of risk varies across different commodities.
Asset allocation: You should allocate funds strategically to Commodity Funds, such that they align with your overall portfolio and investment goals.
Fund selection: Before investing, you should thoroughly research different Commodity Funds available in the market. Trace their historical performances and the underlying commodities in which the funds are invested.
Investment horizon: You need to take your investment horizon into account before investing: whether you are investing for the short term or the long term. This will help you select the right fund that meets your investment goals.
Monitoring: You need to monitor the performance of your Commodity Fund investment regularly and stay updated about the markets. Consider factors such as geopolitical events, demand and supply, and currency fluctuations which directly influence commodity prices.

Also Read: What are Large Cap Funds? - Meaning, features & benefits

Conclusion

Commodity Mutual Funds present an attractive opportunity to diversify your investments and create wealth over long term. However, it is important to select the right fund to invest in as per your risk profile, investment goals, and time horizon.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.