Commodity Mutual Funds: What are the Benefits of Investing in Commodity Funds?

Commodity Mutual Funds: An Overview

Being born in the digital era has opened countless doors to good prospects in every area of development and technology. In the realm of investing, this is also true. Thanks to technology, you may now invest instantly in any asset that suits your needs and preferences. It should go without saying that it must satisfy your financial goals and take into account your risk tolerance.
Today, you can invest in nearly anything that exists, from trendy stocks to the rice you eat. Thanks to the commodity market. Earlier, India had low popularity in terms of commodity mutual funds. However, due to the emerging interest in investing in derivatives, investors have of late started showing interest in the market for commodities mutual funds. In this article, we shall try to explore the basics of commodity mutual funds as well as learn about the most trending commodities mutual funds in India currently.

Fundamentals of Commodity Funds

Let us delve into understanding the nitty-gritty of investing in commodity funds in India.

Commodity Funds India: What are Commodity Funds?

A commodity mutual fund is a type of investment vehicle that invests primarily in commodities and pays investors according to the success of the commodity's market. Commodity funds are linked to underlying assets as commodities, such as the market price of crude oil, gold, metals, etc., in the same way as equity funds are linked to underlying equity assets. Commodities in this context refer to traded things such as food grains, oil, gold, metals, etc.

Trade and business have played an important part in molding our lives for over a millennia, with commodities allowing trade to take place. While the bulk of the population does not actively participate in commodities commerce, we are all indirectly involved. Commodities Funds provide investors an excellent chance to participate in commodity trading while also assisting them in meeting certain financial objectives.

Who Should Invest in Commodities Mutual Funds?

• These funds' returns are not guaranteed in any specific way by the fund managers, therefore they may vary. Because of this, commodities funds are inappropriate for investors seeking either assured appreciation of an investment or fixed returns.
• Commodity funds are a wise investment for those who don't mind taking risks and don't have a set time frame in mind for receiving rewards.
• These investments are appropriate for people who have a substantial amount of cash and want to diversify their holdings.
• Trading in commodities involves a high degree of market research of the underlying asset and the market trend as well as time to educate oneself. Those who don't have the time to learn or such skills might use commodities funds, which are normally run by competent fund managers.

Types of Commodities Funds in India

Following are top 5 types of commodities funds that are available in India as an investment opportunity.

1. Commodities Funds based on Futures: Without ever purchasing the real commodity assets themselves, these funds provide access to commodities through futures contract investments. Due to the market for futures contracts' volatility, this sort of investing may be riskier.
2. Natural Resources Funds: Funds that invest in firms or organizations that have exposure to natural resources are known as "natural resource funds." The most well-known ones are oil, silver, gold, etc. Investments have been made in renewable power sources including wind energy as a result of technological advancements.
3. Index Funds: Commodity index funds are passive mutual funds in which assets are utilized to directly purchase commodities at market pricing based on a benchmark.
4. Combination Fund: This type of vehicle combines commodities futures with the fundamental commodity fund. These funds invest in both basic commodities and commodity derivatives as part of their overall investment strategy. The volatility is controlled by traditional commodities investment whereas the risk is considerable with commodity futures.
5. True Commodity Funds: These funds are referred to as basic since their pooled corpus directly purchases the commodities. These funds primarily invest in materials like metals, food grains, etc that exist naturally.

Benefits of Investing in Commodity Mutual Funds

1. Diversification of the Portfolio: The diversity of the portfolio can be increased by including a commodities fund. Regardless of the state of the market, diversification may lower related risk and encourage steady growth of your capital.
2. The Hedge against Inflation: The majority of commodities funds function as an inflation hedge by providing returns that are consistent with worldwide shifts. Thus,  investments in commodities operate as a hedge to inflation since they offer protection against a currency's declining buying value as a result of inflation.
3. Planned Investment: The majority of commodities funds are run by professional managers who are knowledgeable about the market and are themselves, specialists. Investors could boost their wealth by considering such wise investments.
4. Investment Flexibility: Investors have the constant choice to use commodities funds to achieve their short- or long-term investment objectives. Investors can satisfy their investing criteria by using commodity funds, which can invest in a variety of commodities. A fund can be chosen depending on personal taste, with various needs being met by different funds.
5. Protection Against Volatility: Unlike other commodities, silver and gold are less susceptible to market fluctuations. Even though the market is down, they still offer significant returns due to their great worth.

Precautions on Investing in Commodity funds

• Multiple economic and geopolitical variables affect commodity pricing. For instance, the price of crude oil would decrease if output rises and vice versa.
• Investments in commodities can be highly risky since returns are not guaranteed.
• Asset values may fluctuate more than they would within a more varied fund due to fluctuations in the value of a specific investment.
• Futures contracts may be utilized by commodities-focused stock funds to follow underlying commodities or commodity indexes. Trading in these kinds of assets is speculative and may be quite volatile, so it's possible that the outcome of a fund and the profitability of the underlying asset could diverge dramatically.
• Energy frequently dominates commodity indices, making up a majority of the index. And over half of the assets in a mutual fund that aims to directly mirror the index will be in the energy sector. This might affect your overall investment preferences.

Best Commodity Mutual Funds in India in 2022

Let us now learn about some of the most preferable mutual funds in India currently when it comes to investing in commodities. Please take note the below figures are updated till September 2022. 

Feature Alert: Is there a way to make savings a daily habit? Moreover, can we spend as well as save simultaneously?  Introducing Mini Save. A revolutionary way to save while you spend! Click here to know .

Remember the good old piggy bank that was a common occurrence in many households? Inspired by the simple principle of saving spare change, we launched a new feature: Mini Save. Check how Mini Save helps you to save here!
 

With commodities mutual funds, you may invest in a variety of underlying assets and diversify your exposure. However,  Trading in commodities involves understanding both the asset and the market, and beginners risk making costly mistakes. Prices for commodities can vary quickly. Because of this, one should use caution when engaging in such mutual funds. Consequently, base your investments on your investment objectives and risk tolerance.