Before the pandemic, the demand for commodities saw deflationary pressures. The commodity stocks underperformed the market. This was not a local problem; the situation was the same across the globe. This was evident from the purchase managers index (PMI) for industrial production which spiralled downwards for few quarters, a testimony of weak demand. Due to lower demand on the commodities front, the companies avoided capex in commodity space.

Live TV

Loading...

The pandemic has forced governments to re-evaluate their fiscal policies. The governments are stressing on local manufacturing. Monetary stimulus programs have been announced to support the economy, and the biggest beneficiaries will be commodities. The fiscal stimulus, direct bank transfers will improve the demand going forward. Companies too have realized the need to re-align their supply chains. Against such a backdrop thematic commodity funds deserve tactical asset allocation from investors.

However thematic commodity funds are not for everyone. Being cyclical, the commodity space is highly volatile. There is a lot of noise and It requires experience and expertise to understand such funds. In the past, people have burnt fingers by Investing in rich valuations or have invested in companies that lacked financial discipline. Investing in thematic commodity funds can be highly rewarding for those who are willing to take extra risk.

An investor needs to closely look at valuations while investing in thematic funds. There might be a lot of noise about the sector, it is important to invest judiciously. Ideally while Investing in thematic commodity funds one should consult a qualified financial advisor to avoid making erroneous decisions.

Is the time right to invest in thematic commodity funds? Yes, after a long period of falling inflation the expansionary fiscal policies of the government coupled with efforts to de-globalise holds promise for the companies involved in commodity space. The government's determination to rev up the economic engine and realignment of the supply chain will benefit companies in the commodity space for the years to come. The demand scenario is set to improve and this translates into an opportunity for savvy investors.

How much asset allocation thematic commodity funds deserve? This depends upon the risk appetite of the investor. For someone who is nearing his retirement, these funds might not be a bright idea, but for someone who is young, these funds present an excellent opportunity. Ideally one should allocate 7-10 percent of his portfolio towards thematic commodity funds.

Remember, Investing in thematic funds is the game of patience. Irrespective of the events happening in the economy one must stick to their investments. Due to the volatile nature of these funds, one should invest through SIP. This way they will able to weather the impact of volatility.

Finally, if one can have a longer time frame and can take extra risk thematic commodity funds offer excellent capital appreciation opportunities and deserve a place in one's portfolio. However, these funds are best suited for informed investors, and not for newcomers. For someone who doesn't understand the complexities of commodity space, investments should be made only after consulting a qualified financial advisor.

The author, Abhinav Angirish, is Founder at Investonline.in. The views expressed are personal

(Edited by : Anshul)