commodities

Commodity Mutual Funds

Commodity funds are the mutual funds which invest or trades the corpus in commodities. The returns of such fund directly depends upon the performance of the traded commodity in the market. Learn about the basics of commodity mutual funds to invest efficiently and generate better returns through them.

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  • Average annual returns 3.91%

What is Commodities Mutual Fund?

Commodities have been traded for monetary units for a long time. In the initial days of trade and commerce commodities were exchanged for commodities itself. It is the oldest means of trade and commerce and is still practised on the commodity trading exchange in India. To simplify the commodity trading, mutual fund AMCs provide commodity mutual funds which use commodities to garner gainful returns for the investors. The commodities are exchanged with monetary units in order to generate profit in commodity mutual funds.

  1. What is a Commodity?
  2. How are Commodities Traded?
  3. What is a Commodity Mutual Fund?
  4. Top Performing Commodity Funds
  5. How Does Commodity Mutual Funds Work?
  6. Types of Commodity Funds
  7. Benefits of Investing in Commodity Funds
  8. Benefits of Investing in Gold Through Mutual Funds
  9. Who Should Invest in Commodity Funds?
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What is a Commodity?

A commodity is a raw material which has an economic value that has been either extracted from earth or available in natural raw form. It is an asset which has been traded for money or different commodities for many centuries in India. Due to many reasons like foreign invasions, natural calamities, government policies etc, commodity trading practices have declined. However, even in the present day, directly or indirectly, every individual plays a part in commodity trade.

Commodities exist in their natural form and no extra value can be added or removed by the producer. However, the quality of the raw material can be different for every commodity but these are generally priced equally. Commodities are mainly divided into two subcategories depending on the method which has been used to extract the raw material.

  1. Agri Commodity - This is the agriculture-based commodity which have been grown by farming. Commonly traded agriculture commodities are Corn, Beans, Rice, Wheat, Chana, Castor, etc.
  2. Non-Agri Commodity - This is the commodity which has been extracted from earth or occurs naturally. Commonly traded non-agriculture commodities are Metals, Gold, Crude Oil, Natural Gas, Eggs, Cattle etc.
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How are Commodities Traded?

Commodities in India are traded on the officially registered commodity trading exchanges. There are six major commodity trading exchanges in India, namely:

In India, investment in commodities is done through futures and options. A future contract is an agreement to buy or sell any specific quantity of the commodity at a fixed price at a predefined time and date in future. An option is a contract between a buyer and seller in which the buyer buys the right to buy or sell the shares of a stock or commodity at a predetermined price within a fixed period of time. Trading in options can be risky and inconvenient for laymen. This is where the commodity mutual funds are advantageous.

What is a Commodity Mutual Fund?

A commodity fund is a mutual fund where a fund manager handles the investment in the commodities. Based on how the chosen commodity performs in the market, the returns are generated to the investors. Investing in a commodity fund is much better than investing in the commodities directly as the fund manager who handles the investment of the fund is a professional and has the experience to deal with the commodities. Majority of the asset management companies in India have launched commodity funds which trade only with gold as gold acts as a hedge against inflation and is highly appreciated in India.

Top Performing Commodity Funds

 

How Does Commodity Mutual Funds Work?

The performance of commodity mutual funds is directly dependent on the performance of the commodities in which the fund manager is investing the pooled corpus. If the price of the commodity increases and the profits are booked by the fund manager by investing at the right time, the gain is divided equally among each unit owned by the investors. Any fluctuations in the price of the commodity directly affect the NAV of the commodity fund. There are different risks and benefits of investing in commodity mutual funds.

Types of Commodity Funds

Commodity funds have various sub-categories depending on the investment strategies and investment objective.

  1. Natural Resource Funds :  

    These funds invest the corpus in the companies or organisations which have a business associated with natural resources such as minerals, petroleum, oil, gold, etc. The performance of these funds is directly dependent on the price of commodities with which the business is associated.
  2. Basic/True Commodity Funds : 

    These funds are called basic because the commodities are directly bought by the pooled corpus of the fund. These funds mostly invest in naturally occurring commodity like metals.
  3. Future Funds : 

    These funds are considered as riskiest commodity fund as these are subject to significant fluctuations according to the market rates. The fund manager of a future fund takes a call on future trading. The NAV of these funds can depreciate sharply but can also deliver significant gains if right calls are made.
  4. Combination Funds : 

    As per the name, these funds follow a combined strategy of investing in commodity futures and basic commodity. The commodity future possesses high risk while the basic commodity investing controls the volatility.
  5. Index Funds : 

    The index commodity funds are passively managed mutual fund in which the investments are directly used to buy commodity on the standard prevailing rates based on the benchmark.

Benefits of Investing in Commodity Funds

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Benefits of Investing in Gold Through Mutual Funds

In India, gold is not only treated as a metal commodity for investment but is also worn as an ornament. Most of the Indian families have been buying gold and passing it on to their next generation as a treasure or property. However, incidents of gold theft and snatching are quite common. Apart from this, buying physical gold has a risk of depreciation in the value due to making charges and the purity can also depreciate over time.

To avoid these risks and limitations on gold investment, the investments can be done in a much safer and more beneficial manner through gold commodity mutual funds which are commonly known as gold ETF (Exchange Traded Funds). Investments in gold through Gold ETF can be a much convenient, safe and profitable for the investors. The buying and selling in Gold ETFs have no extra charges and gold can be bought with the periodic investment of amount as low as Rs 500 every month.

Who Should Invest in Commodity Funds?

Investing in the commodity mutual funds requires an understanding of the products and material where the fund is investing. As the commodity market can be highly influenced by the market conditions, the investors must equip themselves with the functioning trends of the commodity markets to make a better decision. These funds are highly subject to market fluctuations and hence do not ensure fixed or guaranteed returns. The investors must be careful of the risks associated and understand the functioning of the commodity mutual funds comprehensively. New investors should take the assistance of an expert for a better investment experience, the commodity funds must be chosen by those who have their investment objective in line with that of the fund.

For a layman, it could be perplexing to analyse the behaviour of commodities and the effects on commodity due to any geopolitical event. To enjoy a fruitful investment experience, take the assistance of financial experts at MySIPonline who have the professional expertise to examine the trends of the commodity in the present as well as future market conditions. The experts can give a unique solution to achieve a certain financial objective for every investor.

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Frequently Asked Questions

Who should invest in Mutual Funds?
funds are suitable for the investors who can digest high risk in search for higher returns. Moreover, these funds are not suitable for the investors who are stepping in the finance market with a short term investment perspective as they might end up delivering negative returns.
What is the minimum investment required for investing in funds?
The minimum investment depends from one scheme to another. In general, for lumpsum investment the minimum investment can range from Rs. 500 to Rs. 5000. Whereas, in case of SIP, the range may vary between Rs. 500 to Rs. 1000. For authentic information, never forget to check the scheme related documents.
What is the investment philosophy followed by companies?
The fund manager of fund targets the best small sized companies having the potential to generate excellent gains in the future. Such companies do not have much resources as the large cap or mid cap companies but have high potential to outperform many big companies.
Why to invest in funds?
funds have more tendency of providing exceptional returns than the other categories of funds. Moreover, they can also be a suitable option for providing diversification to your portfolio.
How risky are funds?
funds are one of the riskiest mutual funds. But at the same time rewards are also high. Therefore, an investor who is willing to expose his corpus towards risk for fetching higher returns should invest in funds.
Are Funds for long term investment?
Yes, funds are a suitable choice for generating long term capital appreciation. Moreover, in short term these funds can cause double digit losses to the investors. Thus, always maintain a long term investment perspective while investing in mutual funds.
What is the benchmark of Fund?
Benchmark is a standard with which a mutual fund competes in terms of growth & performance. Different funds have different benchmark. Thus, read the mutual fund document carefully to know the benchmark.
What are the taxes applied on Mutual Funds?
funds are eligible for two types of taxes- STCG (Short Term Capital Gain) and LTCG (Long Term Capital Gain). STCG is the capital gain generated on the units which are hold for up to 1 year. The STCG tax imposed by the Government of India is 15%. LTCG is the profit generated on the units which are hold for more than one years. The LTCG levied is 10% for the profit above Rs. 1 Lakh.

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