Precious Metal Mutual Funds

There are no mutual funds that are named "Metal" in India. However, there is a category of equity mutual funds that invest primarily in companies engaged in the production, refining, and processing of metals such as gold, silver, steel, aluminium, copper, zinc, and iron ore. 

Currently in India, note that there are no mutual funds that directly invest in Commodities, except Gold and Silver. Some of the funds invest in stocks of companies which are in the mining, production, or processing operations of metals to get exposure to metals. Metal is a key input for many sectors, such as construction, automotives, power generation, manufacturing and infrastructure. As activity in these key sectors picks up, demand for metal increases, which generally supports the performance of metal companies.

How do these Funds Work?

These mutual funds mainly put money into shares of mining and metal listed companies. The stock market returns are depended by the fund generates. Metal is a commodity. The money comes from selling it. The company’s profits is highly affected by metal prices, operating costs, and global demand conditions. 

The metals sector always has an economic cycle. When the economy is growing, the industrial activity is higher, and it will have more metals consumed and metal company profits better. When the economy slows down, the demand will be poorer, prices will lower, and earnings may not be as good. Because of this, mutual funds tend to sharp volatility returns over time.

How to invest in metal-orientated Equity Mutual Funds

Just like with other equity mutual funds, investing in these mutual funds is simple. You need to choose a suitable metal fund based on the fund’s past performance, its risk level, and the fund manager’s experience. You can invest through a lump sum or Systematic Investment Plan (SIP) which allows you to invest amounts regularly.

Key factors influencing returns

Several factors affect the performance of metal oriented equity mutual funds:

• Global demand & supply situation of metals
• Changes in international metal prices
• Overall economic growth & spending on infrastructure
• Costs of inputs such as power, fuel, & raw materials
• Government rules, policies, and trade decisions

Because of these reasons, these equity mutual funds usually react more sharply to economic and market changes than diversified equity funds.

Risks to be aware of

• Higher price volatility than a diversified equity fund
• It is a thematic fund whose performance depends a lot on global macros and commodity prices
• Due to investment in a single sector, risk is comparatively higher

Conclusion

Precious Metal oriented mutual funds can be a proxy for taking exposure to the growth in the metals and mining sector during economic upcycles. However, their cyclical nature also makes them risky bets during down-cycles. Investors should invest in these funds with a long-term investment horizon, realistic return expectations and disciplined portfolio allocation approach.