Commodity Funds Back In Vogue

Though the downturn has taken a toll on them, they are showing a comeback. ETIG tries to find out the performance of commodity funds

COMMODITY funds or mutual funds (MFs) that either invest directly in commodities or in those companies that have a commodity-centric business model have been around for a while now. It is worthwhile to see how such funds have performed and whether these can hold promise for investors, who are keen to tap the commodity market.
    ET Intelligence Group conducted an analysis of the performance of MFs including commodity MFs and specia funds (ETFs) to understand as to which funds really stood the tough times and which can actually withstand the times to come.
    There are more than 10 commodityfocused funds that invest in Indian and global commodity-focused companies (equities). With the exception of SBI Magnum Comma Fund – Growth, which has three-year returns record, most funds are either one-year or less than one-year old. Take the case of Reliance Natural Resources Fund, which is just completed one year.
    On an average, for the last one-year and six-month period, though commodity funds have seen a decline in their net asset values (NAVs), the drop was lower than that in the benchmark Nifty. These funds, for the last one-year and six-month period have fallen to an extent of 35.81% and 20.35%, respectively, while the benchmark Nifty has fallen to an extent of 38.03% and 46.82%, respectively, by similar comparison. So, would these funds continue to fare well than the benchmark Nifty?
    An answer to this question lies in the nature, price movements and overall global situation of the market. One needs to understand that most commodities barring gold, which rose to a new peak, have fallen sharply by over 50% in most cases. Further, such a steep fall would be unsustainable in future.
    For instance, the crude oil prices have fallen by more than two-third in a very short time. A further dip from $30-level would be unanticipated. Though it does not provide any information about the upward potential of prices, it does tell us that downward risk is limited.
    Commodity funds provide investors the flexibility since these funds invest across the commodity based businesses. This also spreads the investment risk when compared to the situation where investors have exposure to individual scrips like ONGC, BPCL, or Hindalco.
    Another thing is that though investors can take positions on the commodity bourses, it requires expertise of gauging demand and supply factors for underlying
produce and intricacies of derivatives contract. The positions are also marked-tomarket on a daily basis, which can expose one to unlimited losses.
    It should be noted that investing in commodity funds should be for a long-term as commodity-focused companies would take at least two more quarters to demonstrate the positive impact of the fall in prices of commodities.
    Apart from commodity funds, investors can consider exposure to gold ETFs. But before that, it is important to understand the recent spurt in gold prices. Investors in Europe and North America bought gold coins and bars in the last quarter of the previous year as the collapse of financial giants triggered purchase of gold as a safe haven. This pushed global retail investment up almost 400% to 304.2 tonnes, according to the World Gold Council. Gold now trades at Rs 15,000-level per 10 grams. A further rise from this level sounds difficult but not impossible.
    Given this factor and high volatility in gold spot prices, it makes more sense to go for gold ETFs than for the physical yellow metal. One can buy gold ETF units in small quantities, when the price seems affordable.
    More so, gold ETF units held for more than one year qualify for long-term capital gains at 20%, whereas the holding period in physical form has to be three years to qualify for long-term capital gains. For less than three years, the gains are taxed at 30%. Also, gold held in paper form is not liable for wealth tax. Hence, investment in gold ETF would be sensible option.
    rajesh.naidu@timesgroup.com