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Investors can choose from various mutual fund schemes depending on their financial goals, risk appetite, and investment horizon. Diversifying one's investment portfolio to achieve better stability in a volatile market is always advised. Besides equity and debt instruments, commodity funds help investors diversify their portfolios across different asset classes.
Commodity funds: Meaning
Commodity funds are mutual funds that invest in the trade of a specific commodity, such as oil, minerals, gold, etc. They are generally structured as Fund of Funds (FoFs) or Exchange Traded Funds (ETFs). Such funds must invest at least 95% of their net assets in physical commodities or commodity ETFs, like gold, silver, etc. The residual assets can be maintained in liquid assets, cash, and other debt and money market instruments.
How do commodity funds work?
Commodity mutual funds invest in commodities belonging to domestic or overseas markets. As such, any valuation gains or losses to the fund are directly driven by the changes in the market prices of the respective commodities. The fund's NAV (Net Asset Value) is declared daily by the fund house.
Advantages of commodity funds
Diversification
Portfolio diversification is one of the significant benefits of investing in commodity funds, as investors get exposure to a different asset class. While equity and debt may dominate most investors' portfolios, a partial investment exposure to various commodities helps diversify & add stability to the overall portfolio.
Hedge against inflation
Precious commodities like gold & silver generally tend to protect the purchasing power of currency within their value. Further, exposure to such commodities may work as an effective hedge against inflation. As such, investing in commodity funds can help investors balance their investment risks to some extent.
Protection against market volatility
The market prices of commodities are not directly correlated with the financial markets and instead carry different economics. There may be a very low/negative correlation between commodities and other asset classes, such as equity and debt. Thus, investment exposure in commodity funds enables investors better cushioning in times of market volatility.
Investing in commodity funds
Investing in commodity funds is similar to investing in other mutual fund schemes. You may invest in commodity funds by physically submitting the application forms at any Official Point of Acceptance (POA) for the mutual fund house or the Registrar & Transfer Agent (R&TA).
An investment transaction can also be undertaken digitally, i.e., through the website/ mobile apps of the mutual fund house or R&TA. Such investment can be made in a lump sum or through a Systematic Investment Plan (SIP). In the case of commodity ETFs, one needs to place a buy order on the stock exchanges through a Demat and trading account.
Taxation of commodity funds
Since the investment pattern of commodity funds is predominantly non-equity, the tax rules for non-equity-oriented funds are applicable for such funds. Accordingly, the gains from commodity funds are classified as Short-Term Capital Gains (STCG) if the holding period of mutual fund units is less than 36 months and taxed at regular tax rates applicable to the investor.
In a more extended holding period, gains are classified as Long-Term Capital Gains (LTCG) and taxed at 20% (plus applicable cess and surcharge) post indexation benefit.
Note: The tax provisions mentioned in the article are for illustrative purposes only and updated as per the Union Budget presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under "Intermediaries/market Infrastructure Institutions". All complaints regarding UTI Mutual Fund can be directed towards service@uti.co.in and/or visit www.scores.gov.in (SEBI SCORES portal). This material is part of Investor Education and awareness initiative of UTI Mutual Fund.
