Review: ICICI Prudential Commodities Fund NFO, A Counter-Cyclical Bet

Commodity funds


Labeling an investment product ‘commodity’ is usually a bummer. However, commodities are raw materials that are used globally. In this backdrop, buying a commodity-oriented fund means you as an investor get to participate in any upturn that commodities can provide if your timing is sweet. ICICI Prudential AMC has launched a new fund offering, ICICI Prudential Commodities Fund. The NFO period closes on October 9. Prepped to bet on metals, cement, chemicals, fertilizers and paper, the fund is an interesting way to have a countercyclical approach to markets. Read on to know RupeeIQ take.

What are commodities

Commodities are raw materials that are either consumed directly or used as building blocks to create products. Some examples are Metals (like Steel, Aluminium, etc.) Gold, Chemicals, Cement, Fertilizers, etc.

An investor can invest in commodities through direct physical purchase, or by investing in commodity futures or investing in commodity-related stocks or mutual funds.

Advantage commodity funds

Direct physical investment in commodities gives the purest form of exposure but that benefit is hugely negated by high storage costs and insurance costs, leading to potentially high transaction costs.

Commodity futures give you exposure without holding physical commodities so no storage or insurance cost, but there are rollover risks and risks of frequent transactions.

Commodity mutual funds offer the best of the class benefits, with little risk. Commodity related stocks and mutual funds provide exposure without holding physical hassle (no storage or insurance cost), no risk of rolling futures, ability to benefit from dividend yield, dual advantages of cost-effectiveness and easy liquidity, as well as better diversification.

ICICI Prudential Commodities Fund ‘VCTS’ framework

As per the AMC, Valuations (V) are attractive in commodities. The Cycle (C) is neutral or mild. Trigger (T) is government reforms and China factor (clamping down on fuel which may change the dynamics of the chemical industry). Lastly, Sentiment (S) is negative due to trade war and Middle East tension.

Thus, its ‘VCTS’ framework favors commodity-oriented investments.

Do remember commodity stocks perform well in high economic activity phase and hence are cyclical in nature. The timing of the cycle is probably very important. If you catch the cycle wrong, exit at profit will be delayed.

Commodity stocks

Fund details

Name – ICICI Prudential Commodities Fund

NFO Period – September 25, 2019, to October 9, 2019

Benchmark – Nifty Commodities TRI

Fund Manager – Sankaran Naren & Mittul Kalawadia

SIP – Available during NFO and Ongoing offer period

SWP/STP – Available during NFO and Ongoing offer period

RTGS and transfer cheques – Till the end of business hours on October 9, 2019

Switches – Switches from equity schemes and other schemes – October 9, 2019; till cut off time (specified for switch-outs in the source scheme)

Minimum application amount during the NFO – Rs 5,000

Exit load – 1% if the amount sought to be redeemed or switch out is invested for a period of up to twelve months from the date of allotment.

How commodity funds have fared

There are at least two more commodity-oriented stock funds.

SBI Magnum COMMA Fund has the mandate to invest a minimum of 80% in stocks of companies in the commodity and commodity-related space. The fund invests in companies engaged in the business of – oil & gas, metals, materials, agriculture, tea & coffee, and textiles. In last 1 year, 3 years and 5 year period ended October 3, 2019, SBI Magnum COMMA Fund has given 0.63%, 5.48%, and 8.20%.

The other commodity-oriented equity fund is Aditya Birla Sun Life Commodity Equities Fund – Global Agri Plan. This is actually an international equity fund. Its performance is not good, with 1 year return being -9.95%, 3 year return being 3.79% and 5 year return being 3.02%.

RupeeIQ take

Metal stocks have remained attractive, due to various global conditions. Commodity stocks have underperformed the broader market and are trading at steep discounts. Plus, commodity-oriented stocks tend to give a higher dividend yield as compared to the broader market, making them an attractive avenue for recurring income potential. Investments in commodity equity mutual funds can provide diversification, wealth creation and hedge against inflation. If you believe ICICI Prudential Commodities Fund ‘VCTS’ framework is accurate, you should consider investments. As a thumb rule, investors in themes should not be the main core of your MF portfolio unless you have very high-risk taking capacity.

Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any mutual fund.

Source: Rupeeiq.com