Commodity Funds
Commodities, as an asset class, include:
food crops like wheat and gram
spices like pepper and turmeric
fibres like cotton
industrial metals like copper and aluminium
energy products like oil and natural gas
precious metals (bullion) like gold and silver
The investment objective of commodity funds would specify which of these commodities it proposes to invest in.
Gold Funds
These funds invest in gold and gold-related securities. They can be structured in either of the following formats:
Exchange Traded Gold fund, which is like an index fund that invests in gold, gold receipts or gold deposit schemes of banks. Each ETF unit typically represents one gram of gold. For every unit of ETF issued, the fund holds gold in the form of physical gold of 99.5 percent purity or gold receipts. They are also allowed to invest in the gold deposit schemes of banks to a limit of 20 percent of the net assets of the scheme. The NAV of such funds moves in line with gold prices in the market.
Gold funds invest in the units of Gold Exchange Traded Funds. They operate just like other mutual funds as far as the investor is concerned.
Gold Sector fund will invest in shares of companies engaged in gold mining and processing. Though gold prices influence these shares, the prices of these shares are more closely linked to the profitability and gold reserves of the companies. Therefore, NAV of these funds do not closely mirror gold prices.
As with gold, such funds can be structured as Commodity ETF or Commodity Sector Funds. In India, mutual fund schemes are not permitted to invest in commodities, other than Gold (which was discussed earlier). Therefore, the commodity funds in the market are in the nature of Commodity Sector Funds, i.e. funds that invest in shares of companies that are into commodities. Like Gold Sector Funds, Commodity Sector Funds too are a kind of equity fund.
Fund of Funds
A Fund of Funds (FoF) is a mutual fund that invests in other mutual funds. It does not hold securities in its portfolio, but other funds that have been chosen to match its investment objective. These funds can be either debt or equity, depending on the objective of the FoF. A Fund of Funds either invests in other mutual funds belonging to the same fund house or belonging to other fund houses. FoFs belonging to various mutual fund houses are called multi-manager FoFs, because the AMCs that manage the funds are different. Fund of Funds looks for funds that fit into its investment objective. It specialises in analyzing funds, their performance and strategy and adds or removes funds based on such analysis. A FoF imposes additional cost on the investor, as the expenses of the underlying funds are built into their NAV.
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