Commodity Mutual Funds
- 7 min read
Do you know you can trade gold, oil, and other commodities in the form of mutual funds? Commodity mutual funds can help you to do so to mitigate your risk and generate higher returns. According to Value Research, commodity-based mutual funds offered up to 19% returns in 2024.
Whether you are an experienced or a novice investor, this blog makes you understand what commodity mutual funds are, their types, features, and other factors.
What Do Commodity Funds Mean?
You must have a basic understanding of commodities before you know the commodity funds definition. A commodity is a product which is traded for another product with a similar value.
Investors trade these commodities on the domestic and international markets. These traded commodities depend on demand and market prices.
Commodity mutual funds are mutual funds that invest in particular commodity trading. Investors can invest in this type of mutual fund to earn a higher return on their investments.
Different Types of Commodity Mutual Funds
There are different types of commodities actively traded each day. Here are the different types of commodity mutual funds:
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Basic Commodity Funds
The basic commodity funds in India invest in naturally occurring assets like gold and silver.
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Futures Funds
One of the riskiest commodity funds is a futures fund. The fund managers of these funds place calls on futures trading of commodities. Depending on the call made, the net asset value (NAV) of these funds can rise or fall.
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Combination Funds
Combination funds follow a combined approach to invest in commodity futures and basic commodities. This type of fund is useful for reducing portfolio volatility and providing attractive returns.
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Natural Resources Funds
The natural resources funds invest in the stocks of companies that explore or produce natural resources like petroleum, minerals, and gold.
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Index Funds
Index funds are passively managed funds, in which fund managers use the corpus to purchase a commodity at standard rates.
Essential Features of Commodity Mutual Funds
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Portfolio Management
Investors can benefit by investing in commodity mutual funds as they are managed by professionals in the commodity market.
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Diversification
You can also diversify your portfolio with commodity funds, which invest in a wide range of commodity-related assets.
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Transparency
This type of fund provides market reports and updates to ensure transparency in portfolio holdings.
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Hedging
Since commodities perform well in times of inflation, investing in commodity mutual funds can protect you against inflation.
If you want to build systematic wealth with mutual funds, you can download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free. PL allows you to invest in more than 2500 mutual fund schemes.
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Global Market Exposure
Commodity funds provide global market exposure for investors. You can benefit from the concurrent geopolitical events, global demand and supply dynamics, and economic trends affecting commodity prices across the globe.
How do Commodity Mutual Funds Function?
A commodity fund investing in the trade of a particular commodity. These mutual funds pool money from investors and invest it in these commodities. Hence, investors get an opportunity to earn higher returns depending on the performance of the commodity market.
The price fluctuations of these commodities benefit investors from rising and falling prices. Since commodity mutual funds have both risks and advantages, you must have a clear understanding of how commodity markets function and the risks and benefits of investing in commodities.
Commodity funds offer a convenient way to invest in commodities without directly trading physical products. This offers diversification and protects from inflation.
Why Should You Make an Investment in Commodity Mutual Funds?
Investing in commodity mutual funds has numerous benefits. Here are some of the reasons for investing in commodity funds:
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Portfolio Diversification
Commodity mutual funds allow you to diversify your portfolio across different asset classes, which helps in managing risks in the long term.
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Protection from Market Fluctuation
You can protect your portfolio from market fluctuation by investing in safe-haven assets like gold and silver. Even in market volatility, their prices remain resilient and safeguard your investments.
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Availability of Fund Manager
Commodity mutual funds in India are managed and overseen by experienced fund managers, who possess an in-depth understanding of the commodity markets. This can be beneficial for you to navigate the complexities of the commodity market.
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Inflation Protection
Commodity funds may offer returns as per the adjustments of the global market. This acts as a good hedge against inflation.
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Tenure Agnostic
You can meet both your long-term and short-term goals by including commodity funds in your portfolio.
Things to Consider While Investing in Commodity Funds
While investing in commodity mutual funds, you must consider the following factors to generate higher returns:
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Investment Goals
Identify your investment goal before investing in commodity funds. If your focus is on making a short-term profit, diversifying your portfolio, or hedging against inflation.
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Fund Type
Research across different types of commodity funds to determine which suits your investment goals best. You must consider factors like historical performance, the expertise of the fund manager, and the investment strategy of the fund manager.
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Expense Ratio
Check the expense ratio of your chosen fund, which is the cost of the fund management. The higher the fees, the lower the returns you get.
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Risk Assessment
Ensure you have a deep understanding of the price volatility of commodities and evaluate whether it matches your financial risk appetite.
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Monitoring
You need to actively monitor factors like global demand and supply, currency fluctuations, and geopolitical events. All of these can influence commodity prices.
Final Thought
Commodity mutual funds not only diversify your portfolio but also allow you to hedge against inflation. With an understanding of the features, benefits, and types of commodity funds, you can make well-informed decisions while investing in these funds.
You can also download the PL Digi MF application to invest in attractive mutual fund schemes of your choice. PL offers you a variety of tools and market insights which help you make informed investment decisions.
Frequently Asked Questions
1. Which is the best commodity mutual fund?
There is no best commodity mutual fund out there. The best mutual fund scheme depends on your goals and risk tolerance.
2. How can you invest in commodity funds?
You can invest in commodity funds by choosing a registered commodity stockbroker and opening a Demat account. You can buy a commodity mutual fund scheme by analysing your investment goals and market risks.
3. Does SEBI regulate commodity mutual funds?
Yes, commodity mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
4. What are the types of commodities that commodity mutual funds invest in?
Commodity mutual funds invest in different types of commodities. These include gold, silver, petroleum, minerals, and others.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
