January 29 , 2013
Prices of commodities such as gold, silver, copper, crude oil, agricultural products have spiraled up in the past one year due to inflationary pressures and global economic slowdown and though we have seen some respite in inflation the general price level of commodities is bleeding our pockets. Wouldn't it be great to invest in these and reap benefits of their upward journey given that you cannot stop them from burning holes in your pockets?
Most people who invest in commodities do so for the purpose of diversification and inflation protection of their portfolio. Price movement of commodities is less correlated to the movement of the general market or stock indices. So including commodities in your portfolio is a great way to achieve diversification. Similarly commodities are the most affected by inflation and holding them in your portfolio will make the overall portfolio well inflation-adjusted.
How to enter commodities
One of the ways of investing in commodities is through futures contracts, which is not very popular among average retail investors. After all who would want barrels of oil or bales of cotton delivered at their flats, in case settlement must happen by delivery? Commodity futures are a game of big money and require knowledge of technicalities.
Investing in commodity based mutual funds is the only viable option for common investors to enter. Commodity mutual funds invest in companies linked to the production, processing and distribution of commodities. Some of them invest in commodity indices, both domestic and/or global. Other funds invest through feeder route, i.e, they invest in funds that make part of a master fund.
Investing in commodity mutual fund is a proxy for investing in commodities. As prices of commodities go up, as is expected for any given time in future, the companies dealing with commodities will gain higher profits and their share prices would rise. Then investors who hold units of funds that have invested in these companies will have made good returns.
Performance of commodity mutual funds
2008 saw a spat of commodity fund launches by mutual fund houses in India. Hence the majority of commodity mutual funds have performance records of around four years. The oldest of the lot is SBI Magnum Comma fund which was launched in 2005.
Commodities funds do well when currencies, the US dollar in specific, fall in value. On the other hand as economic conditions improve, it is expected that increased production activities would lead to higher demand for commodities.
ING Latin America Equity, Reliance Natural Resources, SBI Comma, Mirae Asset Global Commodity Stocks, DSP Merrill Lynch's Natural Resources, Sahara Power and Natural Resources, Birla Sun Life Commodity Equities Fund are some commodity funds in India. Many of them invest in commodity based companies listed in India and abroad.
Investing in commodity mutual funds
Investment in commodity funds should be a long term affair and must not be considered as short term gambling. It is a good idea to hold gold in your investment basket, not exceeding 10% of the total portfolio value.
Commodity funds are thematic funds. Unfortunately most commodity funds in India are predominantly energy sector funds. Since most diversified equity funds have reasonable allocation in energy sector, try to identify commodity funds that are only moderately exposed to energy companies or your overall portfolio might get overweight in one particular sector.