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Agro Funds & Commodity Funds

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Beat inflation with commodity funds
Vi dyal axmi & Preeti Kul karni , ET Bureau Mar 14, 2011, 07.05am IST
It's been ages since consumers have been crying
themselves hoarse over the stubbornly high prices of
commodities. The unacceptable level of inflation has blown
their financial planning strategies off course as soaring
expenses burn a huge hole in their pockets. So how would
you like it if you were given an opportunity to make the
culprits commodities in this case contribute to your
kitty instead of eroding it?
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Enter Commodity Funds
This is where some financial advisors say commodity mutual funds come into the picture. Although , the
option of commodity futures Exists, it involves big money and you may not want to risk such a huge sum in a
volatile market. Instead, you can consider commodity funds. These funds invest in commodities-related
companies such as metals and oil, in India or abroad. The logic is that these companies will clock profits
whenever commodity prices see a spike. As an investor, you stand to indirectly benefit from this price rise by
opting for a commodity fund, which invest in several such companies.
"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%. The current buzz for
international investing, coupled with the rather insipid one-year performance of the broad Indian indices
(around 7%) is inducing funds to market such schemes more aggressively. Even within these, it is primarily
gold feeder funds which are more prominent ," says Jay-ant Pai, vice-president , Parag Parikh Financial
Advisory Services.
A Case For Commodity Funds
"Commodity prices are expected to harden across the world, given the outlook on inflation. Indian investors
can take advantage of rising commodity prices by investing in select feeder funds which invest in a basket of
commodity-oriented stocks internationally ," says Vishal Kapoor, general manager-wealth management ,
India, Standard Chartered Bank. Commodity funds help an investor participate in commodity-led inflation.
India is a net importer of commodities, so in general, Indian assets are negatively correlated with inflation .
"When the investor allocates a part of the portfolio to commodity funds, he partly hedges his portfolio. If
commodity prices go up, inflation would in-crease . Increase in commodity prices would result in positive
returns on commodity funds. Increase in inflation would result in fall in Indian equity and Indian fixed portfolio.
In the past one year, commodity funds have outperformed Indian equities and fixed income as an increase in
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commodity prices have resulted in 20%-plus returns from diversified commodity funds while Indian
equities/fixed income have give single-digit returns. Since commodity-led inflation would continue to be high
in the medium term, an investor should allocate part of his portfolio to commodity funds," says Arvind Bansal,
V-P and head, multi-manager investments, ING Investment Management India.
Agro Funds & Commodity Funds
There are certain mutual funds which do not invest in just commodities but the entire supply chain, which
helps you diversify the risk, say experts. "Commodity prices have risen significantly in past eight months
ended February 2011. Cotton prices have gone up by 146%, sugar by 84% and wheat by 54%," says William
Barbour, director, Deutsche Asset Management. There have been weather-related supply shocks in 2008 and
2010 which caused price spikes. Furthermore , according to the Food and Agriculture Organisation (FAO),
food prices have risen to an all-time high following the severe flooding in Australia this year.
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