Invest in commodities through mutual funds

K. ARAVIND

Investing in commodities is not as common among investors in India as investing in stocks, gold, real estate and fixed income sources. This is due to the limited availability of means to invest in commodities. However, investors have recently had the opportunity to invest in commodities through mutual funds.

Earlier, there was no suitable investment method for those who wanted to invest in commodities. Although there is a way of futures market, the commodity futures market is not familiar to the average investor. A small margin is enough to trade in the futures market. But if the price fluctuation is negative, a higher margin amount needs to be considered to move the contract forward. Failure to roll-over at the end of the contract period during a negative price move can result in huge losses.

Another way is to buy commodity directly. But storage facilities are required to store commodities such as steel or aluminum. If you need to sell for some reason, a buyer should also be available. This may not be always possible. For the average investor, this type of trading is not easy at all.

Another way is to buy shares of commodity companies. Shares of companies that produce commodities can be bought from the market. If the commodity price rises, the share price of these companies will rise naturally. But this method will only be effective if you identify the commodity sector that has the potential to advance and find the best companies in that sector and invest. Selection of stocks is not an easy task for the average investor. This requires research and study of market trends.

One of the benefits of investing in commodities is that they can help bring sustainability to the portfolio. Therefore, with the approval of mutual funds to invest in exchange traded commodity derivatives, a new opportunity has opened up for ordinary investors.

Mutual funds are allowed to invest only in Multi Asset Allocation Schemes and Hybrid Schemes in the Exchange Traded Commodity Derivatives. Up to 30 per cent for multi-asset allocation schemes and up to 10 per cent for hybrid schemes can be invested in commodity derivatives. This will help in further diversifying the portfolio of mutual funds. Such mutual fund schemes can be considered by investors who want to sustain their portfolio by investing in commodities.