Commodity Mutual Funds

Commodity Mutual Funds?

As the name suggests, commodity mutual funds allocate the assets of their clientele in the commodity market. The commodity market entails trading products such as gold, petroleum, coffee, etc., where they are transacted with respect to their demand, supply, and commercial value. Such trading of commodities takes place both domestically and internationally. Providing the investors with an avenue to profit from the volatility in the commodity market. The commodity market globally has been finding its relevance ever since worldwide inflation has severely affected the prices of such commodities.

A commodity mutual fund invests the assets in commodities to earn handsome profits if the commodity performs well in the market. The funds specifically invest in a single commodity and aim to book handsome returns on their investments from the fluctuations in the prices of these commodities. As the investments made in the commodity markets are prone to market volatility, the investor must have a firm grasp on the intricacies and functioning of prices of commodities with respect to various external factors.

Commodity Mutual Funds Types

The commodity mutual funds in India are segmented into diverse categories. These funds are transacted worldwide, and this categorization aids in streamlining and facilitating the transactions.

Basic or True Commodity Funds

The investments in such commodity mutual funds are allocated towards physical assets. In India, investment in basic commodities generally concerns with metals. It is to be noted that funds utilise a pooled corpus to directly invest and profit from the fluctuating prices of these commodities.

Natural Resource Funds

The natural resource funds invest in businesses that primarily facilitate their operations in natural resources like oil, petroleum, solar energy, minerals, and gold. The performance of these funds is subject to the price of the commodities on which the business operations are centred.

Future Funds

The future funds take positions in the future trading of the commodities. It is to be noted that an investment in the future options of the commodities can be risky as such investments are prone to aggressive fluctuations in the market. It has been identified that the NAV of these funds is subject to consistent volatility.

Combination Funds

The combination funds divide the invested corpus between future options and basic commodities. These combination funds allow the investor to balance future options' volatility with basic commodity investing.

Index Funds

The index funds invest in commodities with the strategy to mirror the indexes based on the standard benchmark rates.

Benefits of Commodity Mutual Funds

The commodity mutual fund can prove to be a lucrative investment scheme for investors as it offers the following benefits to the investors:

Inflation

The commodity mutual fund is one of the few investment options that allow investors to book profit on inflation. Commodity mutual funds hedge against inflation as the rise in prices of the commodities further accentuates the portfolio of the investors.

Diversification

The investor who has allocated a percentage of their funds in a commodity mutual fund aids the investor in diversifying their portfolio. It allows the investor to book profits even in unforeseen events, and the market's direction is not very optimistic.

Safeguard Against Market Volatility

The commodities and the equity market share an inversely proportional relationship. An increase in the prices of the commodities would generally signal a fall in the prices of the equities and vice versa. If an investor has allocated their fund to both, it will safeguard them from the volatility of these investment products.

Less Volatility

The market volatility in the commodity mutual fund is far lesser than in the equities. The commodities are far less prone to fluctuations, and the market generally moves slower. They are only affected when there has been a geopolitical development.

Who Should Invest in Commodity Mutual Funds?

Investors inclined to invest in commodity mutual funds should understand the external and internal factors that affect market conditions. The investor should evaluate the current market trends and how these developments would influence the price of the commodities so that they can earn lucrative returns against their investments.

As the returns are not fixed and are subject to fluctuations in the market, the investor must thoroughly asses and analyse the market conditions and risks involved in making the investments. It is advised that first-time investor who wants to invest in the commodity market should park their funds with commodity mutual funds. Fund managers can utilise their expertise and experience to provide lucrative returns to investors. An individual investor with no time or resources to compute the effect of geopolitical developments on the commodities market would often find themselves in a perplexing situation.

How are Commodities Traded in the Market?

The commodity mutual fund in India is transacted on officially registered commodity trading exchanges. Four major trading exchanges in India provide a platform for investors to facilitate trade on commodities.

• Multi Commodity Exchange (MCX): is one of the largest commodities derivative exchanges in the country. The exchange is regulated by the Ministry of Finance, Government of India.

• National Commodity and Derivatives Exchange (NCDEX): a technology-driven exchange platform operated nationwide to transform India's agricultural sector.
• Indian Commodity Exchange (ICEX): The Indian Commodity Exchange is a commodity exchange that specifically offers diamond contracts. This exchange is regulated by the Securities and Exchange Board of India (SEBI). It merged with the National Multi-commodity Exchange in 2017.
• National Multi-Commodity Exchange (NMCEX): After its merger with the ICEX, this platform is the third-largest trading platform that offers contracts to trade commodities such as oil, seeds, coffee, rubber, spices, and other products.

Factors to Consider Before Investing in Commodity Mutual Funds

Investors inclined to park their investment in commodity mutual funds must evaluate the following factors before making their decision.

• The prices of commodities are prone to change due to major developments in various economic and geopolitical factors. For example, when a change in the geopolitical of two countries can affect the prices of the commodities that are transacted between them.
• There is a certain amount of risk involved when investors park their funds in the commodity market, as the returns are not guaranteed. However, the market volatility is minimal when compared to equities.
• Commodities-Focused Stock Funds employ future contracts to follow underlying commodities and commodity indexes. It is to be noted that trading on such assets can be speculative and is subject to consistent volatility.
• The energy sector makes up the majority of the commodity indexes. A commodity mutual fund's performance can determine the performance of the commodities concerned with energy.