Commodity mutual funds – Types and benefits of commodity funds

Commodity Mutual Funds

A shift in investment preferences has led to the rise of commodity mutual funds in India, providing investors with a unique opportunity to diversify their portfolios and capitalise on the dynamic world of commodities.

What are the categories of commodity mutual funds and what are their benefits?

Commodity mutual funds in India encompass a range of categories, each offering distinct benefits to investors:

  • Certain commodity funds invest in natural resources like petroleum

Some of the commodity mutual funds focus on natural resources like petroleum and offer investors exposure to these vital assets. These funds benefit from fluctuations in crude oil prices and provide a hedge against inflation. Investing in petroleum products could be risky as the energy market can be highly volatile and subject to geopolitical factors.

  • Futures funds are high-risk commodity funds

Futures funds invest in commodity futures contracts, which are agreements to buy or sell a specified quantity of a commodity at a predetermined future date and price. They also carry higher level of risk due to the inherent volatility in futures markets.

  • Combination funds invest in basic commodities and commodity futures

Combination commodity mutual funds strike a balance between basic commodities and commodity futures. They aim to provide a more stable and less volatile investment option for their investors by combining both physical commodities and futures contracts. Combination funds spread risk across multiple commodities and benefit from the potential growth of the futures market. This diversification minimises the impact of individual commodity price fluctuations.

  • Mutual fund houses passively manage index funds

Some commodity mutual funds are structured as index funds, tracking the performance of commodity price indices. Unlike actively managed funds, which rely on the expertise of fund managers to make investment decisions, index funds passively follow the movements of specific commodity indices.

What do investors gain by investing in commodity mutual funds?

Take a look at the following factors that shed light on how investors can benefit by investing in commodity mutual funds:

  • Investors can diversify their portfolio

Investors can easily diversify their investment portfolio through commodity mutual funds. They can reduce the risks associated with holding only equity funds or fixed-income securities by adding commodity mutual funds to their portfolio.

  • Commodity funds protect investors from market fluctuations

Commodity funds can also serve as a hedge against broader market fluctuations. During periods of economic uncertainty or inflation, commodities provide a valuable counter balance to traditional investments.

  • Experienced fund managers manage commodity mutual funds

Experienced professionals who know the ins and outs of the commodities market manage several commodity mutual funds. These fund managers use their expertise to make informed investment decisions, increasing the potential for returns.

  • Commodity mutual funds help investors achieve their long and short-term goals

Investing in a commodity by signing up for a commodity mutual fund can help all categories of investors. Short-term investors can benefit from the volatile nature of commodities that can help them make short-term gains. Moreover, long-term investors can use them to safeguard their portfolios against inflation.

Lastly, commodity mutual funds are considered to be good hedges against inflation. Commodity mutual funds represent a promising avenue for investors looking to capitalise on the potential of commodities like gold.