Can you Invest in Commodities with Mutual Funds?

Investing in commodities can help you diversify your portfolio. For a few financial goals, a more stable approach to commodities can help you hedge during uncertainties. 

 

Mutual funds India offer a plethora of options with respect to securities. You can add various asset classes with one or more mutual fund schemes. 

 

 

And, here’s a secret! 

 

You get to invest in them with a monthly investment of as small as ₹500. 

Imagine purchasing gold and silver regularly with just ₹500/month. 

 

Here is a blog that explores the landscape of commodity investing through mutual funds India, examining the available options, potential mutual fund returns, and key considerations for investors. 

 

Let us begin with what commodities are? 

 

What are Commodities?

 

In investments, when we talk about commodities, we are considering raw materials or primary agricultural products that are tradable in the securities markets. Common examples of tradable commodities are gold, silver, copper, agricultural produce, oil, and other industrial metals like aluminium. The quality and exchangeability of these goods. In short, like in physical purchase, there is no quality competition or change with each purchase. Therefore, investors can exchange each unit against another. Investing in these commodities can play a crucial role in the global economy, serving as inputs for various industries and influencing prices across sectors.

 

Investing in Commodities through Mutual Funds

 

While you cannot directly buy a barrel of oil or a sack of wheat through a mutual fund, there can be ways to gain exposure to commodities through mutual funds India:

 

1. Commodity ETFs (Exchange Traded Funds)

ETFs track the prices of specific commodities or commodity indices. They are traded on stock exchanges, offering investors a convenient way to invest in commodities without having to deal with the complexities of futures contracts or physical storage. Common examples are gold ETFs and silver ETFs.

 

2. Gold ETFs and Gold Funds

Every household in India is likely to own some amount of gold. It is used as a common hedge against uncertainty. Owning gold might also be considered a symbol of prosperity. Thus, investors can often consider it as one of the safe heaven asset classes. Gold ETFs track the price of gold, while gold funds invest in gold mining companies or gold ETFs. 

 

3. Gold FoFs

These funds can invest in other ETFs and/or gold mutual funds. These are also a passive category mutual funds India.

 

 

4. Funds with Commodity Exposure

Some mutual fund schemes might have indirect exposure to commodities through their investments in companies involved in commodity-related businesses, such as mining, energy, or agriculture. For example, a sector-specific fund focused on energy might invest in strategic metals,  oil and gas companies, providing indirect exposure to the price of oil.

 

Benefits of Investing in Commodities through Mutual Funds

 

1. Diversification

Commodities can have low correlation with traditional asset classes like equities and bonds. Embedding your portfolio with commodity exposure might enhance diversification. This might also potentially reduce your overall portfolio volatility.

 

2. Inflation Hedge

Certain commodities, like silver and gold, have historically shown a tendency to rise in price during periods of uncertainties like inflation. Investing in such commodities might potentially help preserve the purchasing power of your investments.

 

3. Professional Management

By investing in commodities through mutual funds India, you might benefit from the expertise of professional fund managers who make informed investment decisions based on securities market analysis and research.

 

4. Liquidity

Commodity ETFs such as silver ETFs and gold ETFs can offer high liquidity. This can allow you to transact or trade (buy and sell) them easily on stock exchanges.

 

Gold and Silver ETFs in India: A Deeper Dive

 

With time numerous new gold ETF and silver ETF NFOs (New Fund Offers) have been coming up. Within the realm of commodity investing through mutual funds India, these hold a prominent position. These ETFs offer a systematic, convenient and efficient way to gain exposure to precious metals without the hassles of physical ownership. 

 

Let us explore these ETFs in more detail:  

 

1. Gold ETFs

 

Tracking the Yellow Metal: Gold ETFs track the domestic price of gold bullion. They can replicate the performance of gold prices, allowing investors to participate in the gold market without holding it physically.  

 

Structure and Trading: ETFs are listed on stock exchanges and can be traded (bought and sold) like any other stock. They typically hold physical gold in their portfolio, ensuring that the ETF’s value is closely linked to the underlying gold price.  

 

Benefits

• Liquidity: Gold ETFs can be highly liquid, offering ease of buying and selling anytime throughout the trading day.  
• Transparency: ETFs have transparently disclosed underlying gold holdings. This provides investors with clarity about their investment.  
• Cost-effective: Gold ETFs are passive mutual funds. They typically have lower expense ratios compared to traditional gold investments like jewellery or gold bars, making them an economical option.  
• Purity: Gold ETFs invest in 99.5% pure gold, ensuring the quality of the underlying asset.  
• Security: Investors do not need to worry about the storage and security of physical gold.  

 

2. Silver ETFs

 

Tracking the White Metal: Silver ETFs function similarly to gold ETFs, but they track the price of silver bullion instead of gold. They offer investors exposure to the silver market without the need for physical ownership. 

 

Structure and Trading: Like gold ETFs, silver ETFs are listed on stock exchanges and can be traded throughout the trading day. They hold physical silver in their portfolio, ensuring their value is closely tied to silver prices. 

 

Benefits

• Liquidity: Silver ETFs offer high liquidity, allowing for easy buying and selling.  
• Transparency: The underlying silver holdings are transparently disclosed.
• Cost-effective: They generally have lower expenses compared to traditional silver investments.  
• Purity: Silver ETFs invest in high-purity silver.  
• Security: Investors are spared the concerns of storing and securing physical silver.  

 

Key Differences between Gold and Silver ETFs

 

While both offer exposure to precious metals, there are some key differences:

• Volatility: Silver prices tend to be more volatile than gold prices, meaning silver ETFs can experience larger price swings.  
• Industrial Demand: Silver has greater industrial applications compared to gold, which can influence its price dynamics.  
• Investment Horizon: While both are considered long-term investments, silver’s higher volatility might require a longer investment horizon to potentially ride out market fluctuations.

 

Beyond Gold and Silver: Exploring Other Commodity Investments through Mutual Funds in India

 

While Gold and Silver ETFs dominate the commodity investment landscape in India, there are other avenues for gaining exposure to different commodities through mutual funds. These options might not be as direct or as widely available, but they offer diversification benefits and potential mutual fund return opportunities for investors seeking broader commodity exposure.

 

1. Funds with Indirect Commodity Exposure

 

(a) Sector-Specific Funds

Some sector-specific funds invest in companies involved in commodity-related businesses. These funds provide indirect exposure to commodity prices through the performance of those companies.  

 

• • Energy Sector Funds: These funds invest in oil and gas companies, refining companies, and other energy-related businesses. Their performance is often linked to the price of crude oil and other energy commodities.  
  • Mining Sector Funds: These funds invest in companies involved in the exploration, extraction, and processing of metals and minerals. Their performance can be influenced by the prices of commodities like gold, silver, copper, and iron ore.  
  • Agriculture Sector Funds: These funds invest in companies involved in agricultural activities, food processing, and related businesses. Their performance might be linked to the prices of agricultural commodities like wheat, rice, sugar, and coffee.

 

Examples

 

• ICICI Prudential Commodities Fund: This fund invests in companies across various commodity sectors, including energy, metals, and agriculture.  
• Tata Resources & Energy Fund: This fund focuses on companies in the natural resources and energy sectors, providing exposure to commodities like oil, gas, and metals.  

 

2. International Commodity Funds (Fund of Funds)

 

Investing Globally: While dedicated commodity ETFs tracking a broad basket of commodities are not prevalent in India, you can gain international commodity exposure through “Fund of Funds” (FOFs). These FOFs invest in overseas mutual funds or ETFs that focus on commodities.

 

Benefits

• Access to global markets: FOFs allow you to access commodity markets worldwide, providing broader diversification.
• Professional management: The underlying funds are managed by experienced fund managers with expertise in commodity investing.  

• Examples

• DSP World Gold Fund of Fund: This FOF invests in a gold ETF listed on the London Stock Exchange, providing exposure to international gold prices.  

 

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3. Multi-Asset Funds with Commodity Allocation

 

Diversified Approach: Some multi-asset funds include a small allocation to commodities as part of their diversified investment strategy. These funds offer exposure to a mix of asset classes, including equities, debt, gold, and sometimes other commodities.

 

Benefits

 

• Broad diversification: Multi-asset funds provide diversification across various asset classes, including commodities.  
• Balanced risk and return: They aim to balance risk and return by investing in a mix of asset classes with different risk-return profiles.

 

Things to Look for While Investing in Commodities through Mutual Funds

 

• Indirect Exposure: Keep in mind that most mutual funds India offer indirect exposure to commodities through investments in related companies or overseas funds.
• Volatility: Commodity prices can be volatile, and this volatility will be reflected in the fund’s performance.  
• Research and Due Diligence: Thoroughly research the fund’s investment strategy, expense ratio, and performance history before investing.

 

 

Wrapping Up

 

Direct commodity investing through futures contracts can be complex and risky. Furthermore, buying, storing and selling physical commodities can be full of hassles and uncertainties. However, mutual funds India can offer a more accessible and manageable way to gain exposure to this asset class. Whether you are seeking diversification, an inflation hedge, or exposure to specific sectors, commodities can play a valuable role in your portfolio. Therefore, it is crucial to approach commodity investing with a financial goal-based perspective and a clear understanding of the associated risks. 

 

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