Table of Contents :
Commodity Trade: An Overview
Commodities such as raw material, gold, petroleum, primary agricultural products have long been exchanged in the past. Nowadays, these are traded in the market just like stocks, and investors can become a part of the commodity market for capital gains.
The commercial value of the traded commodities is quite high, that enables them to be a good investment option. Investors can either directly invest in commodities, or invest in a commodity fund to profit from fluctuating market prices of different commodities.
What are Commodity Funds?
Commodity funds invest pooled resources from numerous investors in gold, precious metals, petroleum products, agricultural products, etc. Sometimes, these funds also invest in equity companies that make these products.
The fluctuations in the price of these commodities decide the value of gain & loss incurred by the investor.
Investors gain from the potential upward movement of the price of the underlying commodities. The price swings are dependant on the basic economic principle of demand and supply of the commodities.
How do Commodity Funds Work?
Commodity Funds work like any other kind of mutual fund, where the pooled resources from investors are invested in a certain financial instrument and the returns generated are distributed proportionately. In commodity funds, these financial instruments include commodities such as gold, petroleum products, agricultural produce, etc.
Any upward fluctuation in the price of these commodities generates profit for the investors, if the commodity is sold at a higher price. Understanding the working of these funds require a little more financial knowledge than that of other mutual funds. Therefore, it is advisable for amateur investors to take help from an expert or a mutual fund advisor before investing in commodity funds.
What are the Types of Commodity Funds?
Here is a list of types of commodity funds:
1. True Commodity Funds
These funds predominantly invest in physical assets such as metals, gold, etc. They’ve the direct holding of commodities in the physical form. For instance, a fund that purchases a gold bullion is a true commodity fund.
2. Commodity Funds that hold Futures
Futures is a kind of financial agreement between a buyer and a seller that obligates the former to buy a certain asset at a predetermined date and price.
Commodity funds that use this investment strategy to generate profit bear high risk, as the price fluctuations are very high, and the predetermined price may be more than the current price of the commodity, which effectively results in capital loss.
Holding future derivatives of commodities is a popular investment strategy as majority of investors don’t want the physical delivery of the commodity, but just want to gain from the price movements of the commodities.
3. Natural Resources Funds
Commodity funds that invest in equity securities of companies that trade in natural resources such as petroleum, minerals, etc. are categorized under Natural Resources Funds. With the advent of technology, it has also become possible to invest in renewable energy resources such as wind energy, solar energy, etc.
4. Combination Funds
These funds have the characteristics of both true commodity funds as well as commodity futures funds. For instance, gold funds may hold gold bullions in the physical form in addition to the futures contracts.
Why Should You Invest in Commodity Funds?
1. Professional Expertise
Even if an individual has limited knowledge about the commodity market, s/he can still invest in commodities and materialize from their changing market prices, as the fund is managed by a professional with quality industrial experience.
2. Portfolio diversification
Investment in commodity funds is one of the best diversification strategies, as the commodity market doesn’t move in tandem with the capital market, thus mitigating market risk of the portfolio arising from the latter.
3. Benefit from Inflation
While inflation may affect the capital market negatively, it has a positive effect on commodities market. As the prices of the commodities rise due to inflation, investors experience a substantial rise in the returns on investment in commodity fund.
4. Financial Growth:
The price of various commodities change as per their market demand and supply. The potential of financial growth is high when the demand is high and supply is low, which subsequently increases the price of the commodity. Increase in the price of the commodity renders high profits for the investor.
What are the Risks involved while investing in Commodity Fund?
Investment in Commodity Funds has its own share of risks associated with it. While this investment offers the perfect opportunity for portfolio diversification to a capital market dominated portfolio, it also increases the risk exposure of the portfolio. Since the price of commodities is highly volatile, the fall in the price may result in huge losses for the investor.
The changes in price can be due to multiple reasons ranging from geopolitical instability, natural disasters, currency instability and the global market sentiment.
It is wise to take help from an expert before investing in commodity funds as the intrinsic risk is high, which makes the right selection of commodity at the right time imperative.
If you feel that commodity funds carry too much risk and are taxing on your time, you can consider investing in Equity Mutual Funds or Thematic Mutual Funds investing on the same lines like that of commodity funds. For instance, one can invest in Thematic-Energy Funds.
Here is a List of Mutual Funds you can Invest in FY 2020
| Fund Name | Fund Assets (Cr) | 1 Year Return | 3 Year Return | 5 Year Return |
| SBI Small Cap Fund | 2,704 | 8.33% | 11.28% | 17.04% |
| Mirae Asset Emerging Bluechip Fund | 8,219 | 18.27% | 14.40% | 17.53% |
| Canara Robeco Emerging Equities Fund | 5,235 | 10.38% | 11.25% | 13.89% |
| Nippon India Small Cap Fund (earlier Reliance Small Cap Fund) | 8,425 | -2.60% | 8.14% | 11.82% |
| Kotak Emerging Equity Scheme | 4,960 | 11.35% | 8.38% | 12.89% |
| ICICI Prudential All Seasons Bond Fund | 2,816 | 11.28% | 8.24% | 9.91% |
| Franklin India Dynamic Accrual Fund | 4,012 | 9.51% | 9% | 9.98% |
| SBI Magnum Medium Duration Fund | 1,942 | 11.77% | 9.31% | 9.80% |
| Axis Strategic Bond Fund | 1,188 | 8.32% | 7.68% | 9.11% |
| PGIM India Dynamic Bond Fund | 42 | 13.69% | 9.32% | 10.08% |
| HDFC Hybrid Equity Fund | 21,087 | 9.44% | 9.50% | 10.22% |
| Aditya Birla Sun Life Balanced Advantage Fund | 2,689 | 9.99% | 8.20% | 9.46% |
| ICICI Prudential Equity & Debt Fund | 23,487 | 8.11% | 10.41% | 10.65% |
| Kotak Asset Allocator Fund | 42 | 11.09% | 9.29% | 9.12% |
| ICICI Prudential Balanced Advantage Fund | 27,956 | 12.79% | 10.40% | 10.37% |
| Mirae Asset Emerging Bluechip Fund – Growth | 8868 | 16% | 17% | 16% |
| Axis Small Cap Fund – Direct Plan | 1200 | 23% | 16% | 13% |
| Axis Long Term Equity Fund – Direct Plan | 21492 | 18% | 18% | 12% |
| IIFL Focused Equity Fund – Direct Plan | 446 | 29% | 16% | 12% |
| Invesco India Growth Opportunities Fund – Direct Plan | 1991 | 14% | 18% | 12% |
| Axis Midcap Fund – Direct Plan | 3551 | 18% | 19% | 12% |
| Axis Small Cap Fund – Growth | 1200 | 21% | 14% | 12% |
| JM Multicap Fund – Direct Plan | 143 | 19% | 16% | 11% |
| DSP Natural Resources and New Energy Fund – Direct Plan | 380 | 0% | 9% | 11% |
| Axis Bluechip Fund – Direct Plan | 8749 | 22% | 21% | 11% |
| Axis Long Term Equity Fund – Growth | 21492 | 17% | 16% | 11% |
| JM Tax Gain Fund – Direct Plan | 35 | 16% | 16% | 11% |
| Invesco India Mid Cap Fund – Direct Plan | 621 | 6% | 13% | 11% |
| Kotak India EQ Contra Fund – Direct Plan | 874 | 14% | 17% | 11% |
| IIFL Focused Equity Fund – Growth | 446 | 27% | 14% | 11% |
| DSP Natural Resources and New Energy Fund – Regular Plan | 380 | -1% | 8% | 11% |
| Axis Midcap Fund – Growth | 3551 | 16% | 18% | 10% |
| Invesco India Growth Opportunities Fund – Growth | 1991 | 13% | 16% | 10% |
| Canara Robeco Bluechip Equity Fund – Direct Plan | 257 | 18% | 17% | 10% |
| Axis Bluechip Fund – Growth | 8749 | 21% | 19% | 10% |
| DSP Equity Fund – Direct Plan | 2888 | 20% | 15% | 10% |
| JM Tax Gain Fund – Growth | 35 | 16% | 15% | 10% |
| Kotak India EQ Contra Fund – Growth | 874 | 12% | 15% | 9% |
| DSP Equity Fund – Regular Plan | 2888 | 19% | 14% | 9% |
| Canara Robeco Bluechip Equity Fund – Regular Plan | 257 | 16% | 16% | 9% |
| Canara Robeco Equity Diversified – Direct Plan | 1581 | 14% | 16% | 9% |
| Tata Mid Cap Growth Fund – Regular Plan | 747 | 10% | 11% | 9% |
| Canara Robeco Equity Diversified – Regular Plan | 1581 | 13% | 16% | 8% |
| Invesco India Infrastructure Fund – Direct Plan | 41 | 12% | 13% | 7% |
| Invesco India Infrastructure Fund – Growth | 41 | 10% | 11% | 6% |
| LIC MF Infrastructure Fund – Direct Plan | 55 | 15% | 11% | 5% |
| LIC MF Infrastructure Fund – Growth | 55 | 13% | 10% | 4% |
| Mirae Asset Tax Saver Fund – Direct Plan | 2671 | 18% | 20% | – |
| Mirae Asset Tax Saver Fund – Regular Plan | 2671 | 16% | 18% | – |
| SBI Bluechip Fund – Growth | 22754.43 | -6% | 5% | 10% |
| SBI Magnum MultiCap Fund – Growth | 7582.94 | -5% | 7% | 12% |
| Motilal Oswal Multicap 35 Fund – Regular Growth | 13634.94 | -10% | 8% | 15% |
| Aditya Birla Sun Life Tax Relief 96 – Direct Growth | 8912.66 | 9% | 14% | 12% |
| Mirae Asset Hybrid Equity Fund – Direct Growth | 2037.71 | 15% | 15% | NA |
| DSP Equity & Bond Fund – Direct Growth | 6360.93 | 17% | 12% | 11% |
| HDFC Index Sensex – Direct Plan Growth | 399.64 | 18% | 17% | 9% |
| Nippon India Index Fund Sensex Plan – Direct Growth | 22.55 | 18% | 17% | 8% |
| Mirae Asset Large Cap Fund – Direct Growth | 13064.85 | 16% | 17% | 13% |
| L&T India Value Fund – Growth | 8404.03 | -13% | 6% | 11% |
| DSP Equity Opportunities Fund – Growth | 5720.56 | -8% | 6% | 10% |
| L&T Tax Advantage Fund – Growth | 3420.69 | -13% | 7% | 9% |
| ICICI Prudential Bluechip Fund – Growth | 22182.14 | -6% | 8% | 9% |
| Aditya Birla Sun Life Tax Relief 96 – Growth | 8912.66 | -13% | 7% | 11% |
| L&T India Large Cap Fund – Direct Growth | 493.11 | 16% | 13% | 8% |
| Tata Retirement Savings Fund Moderate Plan – Direct Growth | 1100.88 | 13% | 15% | 13% |
| Tata Retirement Savings Fund Moderate Plan – Regular Growth | 1100.88 | -8% | 8% | 12% |
| Tata Index Sensex Direct Plan | 12.11 | 18% | 17% | 9% |
| HDFC Index Sensex Fund – Growth | 399.64 | -2% | 11% | 8% |
Data as on 08th December 2019: Source- Value Research)