COMMODITIES are an important investment area to consider for an individual and many are looking at the mutual fund route for the purpose of meeting their investment requirements. There are a lot of choices that are present in this area but there is also a specific process that can be followed by the individual while investing so that he is able to get the most out of the situation. Here are a few factors that they need to consider in the entire matter.
Choice: There is a large choice when it comes to the type of mutual funds that can be used to get a commodity exposure. The funds differ according to their investment mandate and hence an individual has to be careful of the manner in which the entire investment will take place.
One of the routes is the exchange-traded fund way, which is present with respect to gold funds. Here there is an exposure to the price of the commodity.
The other option available is investments in equities in companies that are present in the commodities sector. Within this area there is one variation that is also visible in the Indian scenario, which is that the mutual fund options are also available for the purpose of investments abroad so one can take an exposure to commodity companies across the world.
Volatility: The manner of operation of these mutual funds has to be understood so that this will give a proper picture to the individual.
When it comes to the question of commodity funds there is a large amount of volatility that is witnessed in the commodity prices. This happens as they are very sensitive to changes and hence can move in either direction in a large proportion in a short period of time.
This volatility is reflected in the movement of the mutual funds that invest in this area and hence the individual will have to keep this factor in mind when they are investing. They have to be ready to see such movements and hence this will also be an important factor to consider.
Selection: The real benefit of an investment in the commodity space comes with the selection of the commodity to invest in.
The choices in such a case are manifold.
In the first one the choice can be a fund that gets an exposure to the asset price so this can be something like a gold fund tracking the price of gold.
Here the movement will depend entirely upon the price of the gold and no matter what happens elsewhere this will not impact the investor.
On the other hand, there are funds that invest in a particular sector so this will mean an oil and gas fund where the investment is in oil and gas companies where the risk is similar but slightly dif fused. The other option is a wide-ranging fund such as agricultural commodity fund that invests across a range of commodities so gains here will be possible only when the sector as a whole is doing quite well and hence there might be some time here before the results are evident.
Allocation: This investment is not meant for an investor who is starting out on their investment but is for actually someone who has a large portfolio and would be looking for an additional option for diversification.
This is the reason why the allocation to commodities should also not be too high for an investor who is starting to build a portfolio.
The nature of the movement of the commodity prices and the factors that influence them are not easy to understand so it requires a sophisticated investor to be able to deal with this. This is the reason why the investor should actually put in efforts to understand the actual situation and then make the investment so that there is a knowledge base on which the investment is being made.
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