The year 2011 was all about rising costs and expenses. This year is no different either. The liquidity-driven rally in 2012 so far has pushed up the prices of commodities such as zinc (11%), copper (8.78%), Dubai Crude oil (7%), gold (10%) and silver (21%) in US dollar terms. Firm crude oil prices pose a key risk as it can push up the inflation numbers further in India, as crude oil is the largest item on the import bill.
"India is a commodity-deficient country and a rise in commodity prices can push stock prices downwards. Also, a low correlation between commodities and equities makes commodities a good diversification option for investors. Hence, investors should have an exposure to commodities," says Arvind Bansal, vice-president and head - Multi-manager Investments, ING Investment Management India.
Though many agree on the importance of commodities as an investment option, inadequate information and limited options in this space make many investors ignore commodities. But the schemes launched by various fund houses investing in the 'commodity theme' make a good entry point.
Commodity Funds
Indian mutual funds cannot take direct exposure to commodities, keep aside gold. These schemes invest in commodities-related companies such as metals and oil, in India or abroad. You can choose among the schemes that invest in 'energy', 'agriculture' or 'mining' verticals. Each such fund, dedicated to a particular sector or theme, will help investors to invest in companies that mine, manufacture, process commodities or manufacture inputs such as equipment for commodities mining and processing.
In case of agriculture, fund managers focus on companies that manufacture agriculture inputs such as seeds, fertilisers, equipment. The rationale behind this logic is that these companies will clock profits whenever the underlying commodity prices see a spike.
To choose winners when the tide turns in favour of commodities, one can look at MF schemes that help investors pick and choose companies in this space, both in India and overseas. "Investors should invest 5-15% of their equity allocation in such funds with 3-5 year time frame," adds Bansal.
"Most of these funds relate to international commodity stocks either through the direct or feeder fund route. The one-year performance of most of such funds has ranged between 15% and 36%. Even within these, it is primarily the gold feeder funds which are more prominent," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.
Of course, the ride may not be absolutely smooth. You are exposed to risks such as a price correction in underlying commodity, a poor sentiment in stock markets and of course currency risks as you are investing in a global environment.
Gold
There has been a rally in gold prices and industry experts are still bullish on the yellow metal. In 2011, gold delivered a return of 10.72%. Though purchase of physical gold makes many comfortable, gold exchange-traded funds (ETFs) are gaining momentum with Rs 9,201 crore invested in gold through the ETF route due to factors such as ease of transaction, efficient taxation and safety. Units of gold ETFs typically track the gold prices of half or one-gram of gold, as the case be.
Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/why-commodities-are-must-in-your-portfolio/articleshow/11879413.cms
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