Should Commodity Funds Be Part Of Your Portfolio?

Commodities serve as tangible assets that offer investors a means to engage with the real economy and provide a degree of insulation from financial system disruptions. In this scenario, multi-asset allocation funds represent a more efficient vehicle for commodity exposure compared to hybrid schemes. Here are the details

The Indian equity market is currently trading at its all-time high, and equities are delivering returns that have easily outpaced every other asset class over the past year. So, what should be the most ideal course for an investor to take now? Age-old wisdom says that we should be doing a rebalancing act and diversify the portfolio, if not done till now. One of the ways to rebalance is to take profit from the asset whose weightage has increased in your portfolio beyond your tolerance level and invest in the asset that has underperformed, resulting in your portfolio being underweight on that asset class. Right asset allocation and timely rebalancing remain two of the biggest contributors to portfolio returns in the long term.

A retail investor in India has always been comfortable investing in physical assets. Nonetheless, it has been more in a traditional way, such as investing in real estate and physical gold. With the development and advancement in technology, along with a very proactive regulator, the investor has an option to invest in commodities digitally. In fact, commodities is one of the asset classes where you should always allocate some proportion of your portfolio. In the following paragraphs, we will take you through what commodity funds are and outline the reasons for investing in them.

Defining Commodity Funds

Commodity funds are investment vehicles, often structured as either Fund of Funds (FoFs) or Exchange Traded Funds (ETFs), which focus on trading specific commodities like oil, minerals, gold, and others. These funds typically allocate at least 95 per cent of their net assets to physical commodities or commodity ETFs, such as gold and silver. The remaining assets may be held in liquid assets, cash, and various debt and money market instruments. Commodity mutual funds invest in commodities belonging to the domestic or overseas markets.