Disadvantages of Commodity Mutual Funds
1. High Volatility: Subject matter for commodity mutual funds is commodity and they are prone to market fluctuations. Commodities like Oil, gold are highly volatile and any major price swings or fluctuations could have material impact on the portfolio.
2. Market Affected by Speculation: One of the main reason for high volatility of commodity prices is the high number of speculator who takes part in the trading of these commodities. As commodities are highly volatile, there ups and downs attracts those who seek short-term profits and such mass movements of these speculators leads to the price fluctuation on a higher side.
3. Does not Offers Flexibility: Commodity Mutual Funds have to invest 95% in commodities, and this might impact the flexibility which other funds offers to investors. Also it is on the AMC and fund manager in which commodities they want to invest and any option to switch between commodities is not given to the investors.
4. Taxation on Short-Term Holding: If an investor holds a commodity mutual Fund for a short-term duration, say 1 year, he/she shall be liable to pay tax as per their applicable income tax slab rates, and also no benefit of indexation will be available.
5. No Guarantee of Success: The selection of class of commodity is based on the decision by the fund managers or AMC, so the returns will also differ as per the invested category of commodity. So, the fund doesn’t provide sure shot guarantee that it will turn into a successful investment option for the investor, also there is no defined proportion of commodities in which AMC’s or fund manager has to invest.
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