Confused between multi-asset allocation funds and gold or silver ETFs? Here’s how to decide

Investors looking to diversify beyond traditional equity and debt often turn to commodities, with gold and silver being the most popular choices. However, with options like gold and silver ETFs, commodity-themed mutual funds, and multi-asset allocation funds available, the decision can become confusing. Each of these serves a different purpose in a portfolio, and understanding how they work is key to making the right investment choice.

While gold and silver ETFs provide direct exposure to precious metals, commodity funds take a different route altogether. Speaking on one such query, Samir Shah, Founder, Investa Financial, explained that commodity funds are often misunderstood by investors.

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Commodity funds are not direct commodity investments

Commodity does not mean that a fund is actually investing in commodities. These are equity funds that invest in companies linked to the commodity sector, Shah said.

This means such funds invest in stocks of companies operating in sectors like metals and mining, energy, oil, and chemicals. Instead of tracking commodity prices directly, their performance depends on both commodity cycles and company fundamentals.

Shah further highlighted that technically it is an equity fund, but the theme is that rather than investing in various sectors, they have narrowed down to companies which are directly linked to the commodity sector.The query specifically focused on the ICICI Prudential Commodities Fund, how it is exposed across different commodities, what sectors it covers, and whether investors need a dedicated commodity fund in their portfolio.

Shah said that when one talks about commodity funds, it is not necessary that a person should have them in the portfolio, though these funds are good for investors who understand commodity cycles well. These are not long-term funds.

The expert further said that firstly, if an investor feels that over the next one year, two years or three years this sector will perform well, they may invest and then move out. Secondly, the fund is suitable for aggressive risk-takers because it is a very concentrated fund. There is a possibility that adverse factors, such as monsoon or other events, may impact this sector significantly, and there is a possibility that this sector may become very volatile.

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Thirdly, when a person has a very large portfolio and wants to add something new, such investors can consider these specific funds.

At present there are five funds based on commodities. Apart from ICICI Prudential Commodities Fund, there are two active funds: Quant Commodities Fund and SBI Commodities Fund. There are two passive funds as well: ICICI Prudential Nifty Commodities ETF and Kotak Nifty Commodities Index Fund.

Return expectations

Commodity funds have delivered strong returns in certain phases. Over the past three to five years, some funds in this category have generated average returns of around 20–22%. However, these returns are not consistent and can fluctuate sharply.

“Investors should not choose these funds purely based on past returns. There is always a possibility of negative returns,” Shah cautioned. As a general benchmark, he suggested assuming a more moderate return expectation of around 12% CAGR when planning investments.

How much should you allocate?

Given their high-risk and concentrated nature, Shah recommends keeping exposure limited. “Allocation should ideally be between 5% and 10% of the portfolio, depending on the investor’s risk appetite, and should not exceed that,” Shah said.

How do they compare with gold, silver ETFs and multi-asset funds?

Gold and silver ETFs track the price of the underlying metal and are often used as a hedge against inflation or uncertainty. Their returns are directly linked to commodity price movements.

Multi-asset allocation funds, on the other hand, combine equity, debt, and commodities within a single portfolio. They offer diversification and reduce volatility by spreading investments across asset classes, making them suitable for investors seeking a balanced approach.

Commodity funds sit somewhere in between. While they provide exposure to commodity-linked sectors, they behave like equity funds and can be more volatile due to their concentrated nature.

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For most investors, a diversified approach through multi-asset funds or a small allocation to gold ETFs may be sufficient, while commodity funds can be used selectively to capitalise on specific market cycles.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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