Commodity Mutual Funds

What Are Commodity Funds?

Mutual fund-based investments in specific commodities or companies involved in the production of specified commodities are referred to as commodity funds. Typically, commodity funds do not invest in commodities directly but rather acquire their exposure through units of a mutual fund that may track commodity prices or through companies whose performance is linked to commodities.

This type of investment allows for diversification of an investor's portfolio beyond traditional equity and fixed income investments. Investors often utilise commodity funds as a method of protecting their investment from inflation and to provide diversification from the volatility of the marketplace.

How Do Commodity Funds Work?

Commodity mutual funds enable individual investors to pool their resources to invest in commodities or investments that track them, including commodity futures, exchange-traded funds (ETFs), and stocks of companies that produce commodities. Investment decisions will be made by experienced fund managers who track various factors, including trends in commodity markets, supply/demand for specific commodities, and factors affecting global commodity prices/markets, to determine when to buy and sell.

Returns to investors will be based upon the fund's Net Asset Value (NAV), which fluctuates based upon changes in commodity prices and the performance of a fund's investment portfolio.

Types Of Commodity Funds

• Gold Mutual Fund: Invest in gold-related instruments, including gold ETFs that provide exposure to gold without physically handling it.
• Silver Mutual Fund: Invest in ETFs and silver-linked asset classes; therefore, they are an excellent way to diversify investments outside of gold as well.
• Energy Commodity Funds: These are made up of a single commodity (such as crude oil or natural gas). The money is invested through financial instruments that are linked to these commodities.
• Agricultural Commodity Funds: These will give investors the ability to gain access to various commodities, from wheat to sugar to coffee, and they can freely be traded on the open market.
• Multi-commodity Funds: They have a variety of investments in multiple commodities to reduce their risk of being dependent on a single commodity.
• Commodity Equity Funds: These will invest in a company's stock that mines or processes metal or energy or agriculture.

Benefits Of Investing In Commodities Mutual Funds

• Portfolio Diversification: Investors can use commodity mutual funds to diversify their portfolio by providing an alternative to traditional equities and bond investments.
• Inflation Hedge: Commodity prices increase during periods of high inflation, which can help protect your purchasing power from being reduced due to inflation.
• Professional Management: Professional managers are employed to manage commodity mutual funds and track commodity market trends, allowing you to invest in commodities without having to keep track of the commodity market on your own.
• Lower Risk: Investing in mutual funds is less risky than investing in commodities directly through futures contracts or other direct trading methods.
• High Liquidity: Commodity mutual funds offer liquidity and convenience, making them an easier way to buy or sell commodities.

Risks Associated With Commodities Mutual Funds

• Price Volatility: Commodities face many challenges due to the volatility of prices from changes in global demand and supply. Commodities can change greatly in price based on conditions such as weather events, production levels, and world demand trends.
• Global Risks: Commodities can also face risks related to the global economy, geopolitics, and trade. Commodity prices and fund performance can be heavily influenced by global events, including geopolitical turmoil, trade policy, restrictions on trade, and other economic factors.
• Currency Risk: Currency fluctuations can also affect commodities priced in US dollars. Therefore, if you invest in commodities, you will be affected by fluctuations in exchange rates when calculating your return on investment.
• Lower Returns: While commodities are typically projected to generate long-term capital growth, they do not provide the same degree of long-term capital appreciation as equities.
• Economic Cycles: Commodities are highly cyclical and typically follow the same economic cycles as countries. The price of an individual commodity can change due to variations in its geographic region or in the overall economy.

Who Should Invest In Commodity Funds?

• Investors interested in diversifying beyond just stocks and bonds may find that commodity funds offer an alternative to traditional asset classes in a balanced portfolio.
• Investors who want to protect themselves against inflation will be able to do so by investing in a commodity fund as a hedge against rising prices.
• The most suitable investors for commodity funds are moderate- to aggressive-risk takers and long-term-oriented investors, as commodity funds tend to be highly volatile.
• Investors looking for exposure to commodities without physically possessing them can access them through a commodity fund without having to deal with the actual commodity or store it.

Taxation On Commodity Mutual Funds

Commodity mutual funds are treated as non-equity assets, so any gains made on them will also be taxed in accordance with non-equity capital gains rules. As current law states, if you sell shares of a commodity mutual fund within 24 months, then any resulting gain will be considered as short-term capital gain (and added to your total income) and taxed at your personal tax rate (for example, 5%, 20% or 30%, depending on the individual’s tax bracket and chosen regime).

If you hold the shares for longer than 24 months, then the resulting gain will be considered a long-term capital gain and taxed only at 12.5% as per the Unified Capital Gains Tax (for non-equity funds).

Ways To Invest In Commodity Mutual Funds

• Commodity mutual funds: These are mutual funds that provide investors with access to commodities and/or their related indices, subject to SEBI approval.
• Commodity ETFs (for example, Gold ETFs): These are exchange-traded funds (ETFs) that follow the prices of commodities and can be traded on Indian stock exchanges.
• Fund of Funds(FoFs): It is a mutual fund that buys international commodity ETFs or global commodity funds.
• Thematic/resource equity funds: These are mutual funds that invest in companies engaged in metals, mining, energy, or commodity production to provide indirect exposure to commodities.

Invest In Commodity Funds On Kotak Neo

You can invest in commodity mutual funds on Kotak Neo in a few simple steps.

• Sign in to the Kotak Neo app using your registered credentials.
• From the bottom menu, open More and scroll down to the Mutual Funds section.
• Use the search bar to find the commodity fund you’re looking for, this could be a gold fund or any other commodity-linked scheme.
• Open the fund page to check its details before proceeding.
• Hit Invest and decide whether you want to invest once or set it up as a recurring SIP.

Factors To Consider When Investing In Commodity Funds

• Risk Tolerance: Understand how much price fluctuations you will be comfortable with.
• Investment Horizon: Determine whether you will reach your long-term goals within the time frame you desire by adding commodity exposure to your portfolio.
• Portfolio Allocation: Determine which commodities would be most helpful to your current investment portfolio rather than dominating it.
• Investment Type: Determine whether you want to invest only in one area (gold, energy, metals, agriculture) or have a diversified portfolio of commodities.
• Price Cycles: Review how the commodity you are considering has performed across different price cycles it has gone through over time.
• Global Elements: Be sure to watch for the supply/demand factors related to the underlying commodity and then note any geopolitical events occurring worldwide that may impact the price of your commodity.
• Historical Performance: Review the annual performance over the past several years of the commodity you are considering, and remember that past performance does not guarantee future returns.
• Investment Costs: Compare the expense ratios and other related costs to investing in commodities with overall returns over time.