In India, there are various asset classes in which investors diversify their portfolio to get better returns like equity, debt, currency, commodity, and ETFs. Commodity investing is not a new concept for Indian investors as there are various commodities in which investors have their trust and give preference over other asset classes.
By looking at the interest and decent returns of commodities, mutual fund companies have entered into the industry to establish a diversified portfolio and have a better utilisation of resources. Let’s know everything about commodity mutual funds.
What is commodity investing?
Commodity literally means goods that have a physical presence. In India, commodities include gold, silver, crude oil, crops, agricultural raw materials, etc. In business life, they are traded in bulk in the physical market. But, you as an individual can also invest in any commodity without owning them physically.
You can invest in commodities through option trading, future trading, or directly too. The price movements of commodities are governed by demand and supply only. You can earn through these movements in commodity’ price as similar to stocks.
What are commodity mutual funds?
Just like we have mutual funds categories based on equity, debts, and hybrid, we have commodity mutual funds. In which fund managers pool investor’s money and invest strategically in commodities. The whole process of mutual fund investment will be the same in such a case. Only difference lies in commodity mutual funds is they invest a major portion of their pooled fund in commodities or their respective options and futures.
Advantages and disadvantages
Portfolio diversification
Just like other assets, commodity mutual funds are also an asset class that have shown decent returns in the past. You can diversify your portfolio by investing in it to hedge against other risky investments.
Expertise in the industry
You cannot have a full fledged knowledge of all the commodities traded in the exchanges. By investing in commodity mutual funds, you will get an expertise in subject matter that helps you in optimising your portfolio returns as your fund manager.
Hedge against market fluctuations
No investment is totally risk-free, but a few commodities like gold and silver do not go parallel with the conditions of stock markets. They tend to behave opposite to the stock market patterns. However, it is not always true.
Adverse effect of macroeconomic conditions
It is true that commodities do not get affected by the microeconomic situations but it does get negatively affected by the unfavourable macroeconomic conditions, political, and social factors. The latest example is the prices of crude oil getting higher day by day during the war between Russia and Ukraine.
If you are an investor who is looking forward to not entering into the volatility of the stock market and willing to hedge against the inflation at the same time, commodity mutual funds could be an option to invest in. Always remember that putting all your eggs in one basket will lead you to a huge investment loss. Commodity mutual funds could help you in diversifying your portfolio.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
