Modern day trade and commerce practices have shaped our lives in multiple ways. Commodities have been enabling trade practices since times unknown. Although a large population doesn’t directly take part in commodity trade, almost everyone is at least an indirect participant in it.
Commodity focused stock funds or commodity mutual funds provide investors an opportunity to participate in the commodities trading and help them achieve certain financial goals. Today, many smart investors aim to achieve diversification in their investment portfolios by investing across various asset classes, however, commodities are often ignored because of lack of knowledge on commodities trading.
Here, we will explain some basics of commodity focused stock funds and share information around these that all new investors must know.
What are Commodity Mutual Funds?
Before understanding commodity-focused mutual funds, we first need to understand the term commodities. Commodities are goods and services that can be traded. Some of the commonly traded commodities include coffee, food grains, gold, silver, poultry, etc.
A Commodity Mutual Fund or a commodity focused stock fund is a mutual fund that invests in one or many commodities according to the fund’s investment objective. Commodity mutual funds are managed by professional fund managers and these help investors to gain exposure to the commodities market.
How do Commodity Mutual Funds work?
Commodity mutual funds in India invest in physical commodities or commodity ETFs. The structure of commodity mutual funds in India resembles that of an Exchange Traded Fund (ETF) or Fund of Funds (FoF). Commodity mutual funds invest a minimum of 95% of their assets in physical commodities or commodity ETFs. Commodity mutual funds can be classified into two types:
- Basic/True Commodity Funds: These funds predominantly invest in naturally occurring physical assets like metals.
- Commodity Equity Funds: These funds invest in equity shares of companies that are engaged in the production and distribution of commodities.
Types of Commodities that Commodity Mutual Funds invest in
Many mutual fund houses offer a number of commodity focused mutual funds that are actively traded in the international market. Commodity funds often cover a diverse spectrum of commodities. Here are the common types of commodity focused stock funds available in the mutual fund market:
Natural resource funds
These mutual funds invest in companies that deal in natural commodities. The common ones are gold, silver, oil, etc. Today, many companies also invest in renewable energy sources like wind energy and form part of some mutual fund investments.
Basic/true commodity fund
These funds invest in companies dealing with physical assets, like metals.
Futures
Commodity futures are popular among seasoned investors since these involve physical delivery of the commodity only as per the predetermined date. These are generally riskier due to fluctuations in rates and higher therefore, higher chances of losses.
Index funds
Index commodity mutual funds are passively managed mutual funds. These funds invest the pooled money directly in commodities by referring to the benchmark index composition.
Combination fund
A combination fund invests in basic commodities and also commodity futures.
How to Decide if a Commodity Mutual Fund is Right for You
While investing directly in commodities, investors must have extensive knowledge of the different types of commodities. Since this could be difficult for many, investors can rely on commodity mutual funds since their investment is handled by professionals.
Let’s have a look at some of the key features and benefits of commodity mutual funds that attract investors to them:
1. Diversification
Commodity mutual fund investments help in achieving portfolio diversification, especially for investors who are ready to take on medium-high risk. Experts suggest that often, stock markets and commodities markets have a negative correlation and this can help in hedging against risks.
2. Protection against volatility
Commodities like silver and gold can act as a hedge against market fluctuations. These may also provide reasonable returns during a downturn in the equity markets.
3. Protection against inflation
Commodity mutual funds may provide returns in line with the global markets. Hence, these can be used as a hedge against inflation.
4. Professional fund managers
With the involvement of professional fund managers, the mutual fund can make better investment decisions as per fund manager’s expertise. These managers often have first-hand knowledge of the markets and can choose the best commodities to invest using the right risk-return combination.
5. Flexibility
Commodity Mutual funds provide a range of options that can be used by investors to meet their financial goals. Investors also have the option of meeting short-term or long-term investment goals using commodity mutual fund investments.
6. Risk
The commodity mutual funds come with different types and levels of risks, some of which are:
- Geopolitical issues
- Market trends
- Global market movements
Who can invest in commodity mutual funds?
Individuals who have basic to medium level knowledge of commodities can opt for commodity fund investments. Commodity fund performance may vary as per the market and are subject to many risks. Thus, investors who are willing to take on higher risk can consider commodity mutual funds.
Although these are professionally managed, commodity mutual funds may not have any fixed guarantee on returns. Hence, these are not suited for individuals who want fixed or guaranteed returns from an investment. People who are far from their retirement period can invest in these.
Individuals who are not risk averse and those who do can remain invested for an undefined period till sufficient returns are generated can invest in commodity mutual funds. People who have sufficient or extra funds may also benefit from these investments.
Top Commodity Mutual Funds in India
Here are some of the top-performing commodity mutual fund recommendations:
Aditya Birla Sun Life Commodities Equities Fund Global Agri Plan Direct Growth
Fund Information – The scheme invests up to 35% in stocks issued either in India or up to 65% in overseas stocks of specific commodity focused companies. It also aims to invest up to 35% in overseas mutual fund schemes with similar investment objectives. Along with this, it also invests in stocks that are part of the S&P Global Agribusiness Index.
| Inception Date | January 1, 2013 |
| Benchmark Name | CRISIL Overnight Index |
| S&P Global Agribusiness Total Return Index | Milind Bafna |
| Expense Ratio | 1.28% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 72.17% | 17.63% | 11.02% | 9.63% | 9.74% |
DSP World Agriculture Fund
Fund Information – The main investment objective of the scheme is to achieve capital appreciation through investments predominantly in units of BlackRock Global Funds – Nutrition Fund (BGF – NF). To meet its liquidity requirements, the fund also invests in money market securities or liquid schemes of DSP mutual fund from time to time.
| Inception Date | January 2, 2013 |
| Benchmark Name | MSCI All Country World Total Return Index |
| S&P Global Agribusiness Total Return Index | Jay Kothari |
| Expense Ratio | 2.25% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 43.18% | 20.71% | 15.17% | 11.74% | 8.49% |
DSP World Mining Fund – Direct Plan – Growth
Fund Information – The main investment objective of the scheme is to achieve capital appreciation through investments predominantly in the units of BlackRock Global Funds & World Mining Fund (BGF – WMF).
| Inception Date | January 3, 2013 |
| Benchmark Name | Euromoney Global Mining Constrained Weights Net Total Return Index |
| S&P Global Agribusiness Total Return Index | Jay Kothari |
| Expense Ratio | 1.52% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 87.98% | 41.94% | 21.28% | 22.71% | 5.13% |
ICICI Prudential Regular Gold Savings Fund(FOF) Direct Plan Growth
Fund Information – The main objective of the scheme is to generate returns from investments in units of ICICI Prudential Gold ETF.
| Inception Date | January 1, 2013 |
| Benchmark Name | Domestic Price of Gold |
| S&P Global Agribusiness Total Return Index | Manish Banthia, Nishit Patel |
| Expense Ratio | 0.09% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| -0.21% | 20.59% | 13.65% | 8.65% | 4.24% |
SBI Gold Fund Direct Plan Growth
Fund Information – The scheme aims to generate returns that are corresponding to returns provided by SBI Gold Exchange Traded Scheme through primarily investing in SBI ETF Gold scheme.
| Inception Date | September 12, 2011 |
| Benchmark Name | Price of Gold |
| S&P Global Agribusiness Total Return Index | Manish Banthia, Nishit Patel |
| Raviprakash Sharma | 0.10% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| -1.34% | 21.49% | 14.00% | 8.95% | 4.25% |
Nippon India Gold Savings Fund – Direct Plan – Growth
Fund Information – The main objective of the scheme is to achieve returns that closely correspond to returns generated by Nippon India ETF Gold BeES.
| Inception Date | March 7, 2011 |
| Benchmark Name | Domestic Price of Gold |
| S&P Global Agribusiness Total Return Index | Mehul Dama |
| Raviprakash Sharma | 0.10% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 0.33% | 21.26% | 13.62% | 8.69% | 4.08% |
How to Invest in Commodity Mutual Funds
To invest in commodity mutual funds, you can download the Fisdom app on your smartphone. After following the simple KYC steps, you can begin investing in some of the top performing commodity mutual funds.
Conclusion
Commodity mutual fund investments have unique characteristics and benefits, however, investors must carefully consider the risk-return profile of specific mutual fund schemes before making an investment decision.
FAQs on Commodity Mutual Funds
- What are commodity mutual funds?
A commodity mutual fund invests in companies dealing with commodities or in other commodity-specific funds. This allows investors an opportunity to diversify their portfolio and earn returns as per their risk profile.
- Can mutual funds invest in commodities in India?
Mutual funds in India can directly invest in gold as a commodity. Most commodity funds therefore either invest in stocks of companies dealing in commodities or purchase units of funds that invest in commodity-specific companies.
- How do I invest in a commodity fund?
It is easy to invest in a commodity mutual fund through the Fisdom app as it allows seamless investment procedure that can be done on your smartphone. It has some of the top-rated mutual fund options for investors to explore.
- Are commodity mutual funds high risk?
Commodity mutual funds could be risky for investors who are just starting off with mutual fund investments. These require basic understanding of commodities and their risk-return profile. Once an investor gains comfort on these lines, commodity mutual funds can be added to the investment portfolio for achieving diversification and risk-adjusted returns.
