In a growing and fastest-growing economy like ours, which often propagates ‘Make in India’, and is consumption-led, commodities play a pivotal role.
Commodity companies are not just suppliers, they are the strategic backbone for India, which aspires to be a $7 trillion economy by 2030.
Whether it is metals, mining (including precious metal mining), energy, cements, chemicals & fertilisers, capital goods, fast-moving consumer goods, automobiles & components, electronics, electricals, furniture & fittings, household durables, textiles, sanitation goods, lifestyle products, gems & jewellery, etc., several Indian companies, today, are producing it all.
This is ensuring supply chain stability, price discovery, boosting industrial growth, and making the country self-reliant.
Commodities, as a whole, is a massive market – worth hundreds of billions – and a key growth driver.
Given this, the Nifty Commodities Index (which represents the behaviour and performance of a diversified portfolio of 30 companies representing the commodities segment, such as oil & gas, petroleum products, cement, power, chemical, sugar, metals and mining) has also seen a stellar run-up since its launch in September 2011.
Particularly, in the last five years since the pandemic, the Nifty Commodities Index has more than doubled.
If you, too, wish to participate in India’s commodities growth story, commodities funds is a worthwhile option.
What are Commodities Funds?
These are thematic mutual funds investing in equity shares of companies engaged in commodity business, such as metals, mining, oil & gas, petroleum products, chemicals, fertilisers, energy, and a host of others.
They do not have direct exposure to commodities per se, and do not necessarily own gold and silver in their portfolio. Their investment strategy is to have exposure to listed companies manufacturing or trading in various commodities. Depending on whether the fund is actively managed or passive, the portfolio is accordingly managed.
In the case of passively managed ones, i.e. the commodity index funds or commodity ETFs, the strategy is investing in the same set of stocks and in the same proportion as in the underlying benchmark index, usually the Nifty Commodity Index. The fund manager of passively managed commodities funds does not actively manage the fund, except to rebalance the portfolio.
These funds charge a low expense ratio, given no active fund management. If you are looking to keep the cost of investing low and to earn returns almost in line with the Nifty Commodities index, then commodity index funds or ETFs may be considered. That said, the volatility, drawdowns, and reversals, too, would be closely hinged to that of the underlying index.
On the other hand, in the case of an actively managed commodities fund, the fund manager has the discretion as to which stocks to include or exclude, doing in-depth research, which includes valuations, company-specific factors, the commodities cycles, etc.
Therefore, it does not hold stocks in the same proportion as in the Commodity Nifty Index. The approach is not rule-based.
Over and above the dominant portion (80-100%) in equities of companies engaged in commodity and commodity related sectors, it may also invest up to 20% in other than commodity stocks, REITs & InvITs (up to 10%), gold & silver ETFs, and for defensive consideration into debt & money market instruments or hold cash for that matter.
Given this, the expense ratio in the case of actively managed commodities funds is higher.
With active fund management, there are also chances of earning higher returns than the underlying Nifty Commodities Index.
Volatility may also be lower, depending on the weightage to respective stocks, sectors, and/or allocation to debt & money market instruments or cash equivalents. It depends on how prudently an active commodities fund is managed.
Other Commodity Funds
In addition to the aforesaid funds, there are other funds, such as the following:
- Gold mutual funds: Gold ETFs and Gold Saving Fund
- Silver mutual funds: Silver ETFs and Silver ETF Fund of Funds
These commodity funds invest in gold and silver directly or indirectly.
The gold and silver ETFs have a direct exposure to the precious metals, whereas the fund of funds invests in their gold or silver ETF, as the case may be, which, in turn, benchmarks their performance against these respective precious metals.
In the last couple of years, commodities funds investing in these precious metals have reported remarkable inflows against the backdrop of geopolitical tensions, military conflict, and macroeconomic uncertainty.
Moreover, the manifold increase in the price of gold and silver is a key factor driving investor interest.
[Read: Gold, Silver ETF Fund of Funds: Anchoring Your Wealth Amid Uncertain Times]
Risk-Returns
The data from Value Research reveals that actively managed commodities funds investing in shares of has clocked a compounded average growth rate (CAGR) of around 17% over the last 3 years (as of 21 January 2026).
The risk, as denoted by the standard deviation, was in the range of around 15% over the last 3 years.
The Sharpe ratio of the funds has been around 0.81, indicating decent returns on a risk-adjusted basis.
The gold ETFs and silver ETFs, on average, have clocked 39.2% and 63.8%, respectively, over the last 3 years (as of 21 January 2026) with a stupendous surge in the price of the precious metals.
The average standard deviation has been 13.6% for gold ETFs and 31.0% over the last 3 years.
What do you need to keep in mind?
Commodities offer you diversification. Except for gold, most commodities, including silver, are highly cyclical. In other words, it depends on how the economic undercurrents are as well.
Gold, on the other hand, is countercyclical. Meaning, when the equities go down in times of macroeconomic and geopolitical uncertainty, gold turns bold, proving its trait of being a haven, a store of value, a hedge, and an effective portfolio diversifier.
Allocating a small portion (around 10-15% of your total portfolio) to commodities through mutual funds may prove sensible as opposed to going gung ho. Make sure you have a high-risk appetite and have a longer investment horizon (5-10 years or more).
Invest thoughtfully, considering not just the historical returns (which may or may not repeat in the future) but also the risk involved.
At a time when both the Nifty Commodity Index and gold and silver prices are near the lifetime high, it makes sense to take the SIP (Systematic Investment Plan) route as opposed to making a lump sum investment.
The returns you would earn would be closely linked to how the commodity cycle plays out, the rupee movement, interest in the economy, customs duties, and a host of other factors.
The returns earned would be subject to long-term or short-term capital gain tax.
Happy investing!
