US-Iran Tensions Spark Investor Interest in Defensives and Commodities Mutual Funds

Global Financial Markets Uncertainty: A Cautionary Approach to Defence and Commodities Mutual Funds

Key Takeaways:

• The ongoing conflict between the United States and Iran has introduced new uncertainty into global financial markets, causing significant fluctuations in equities and commodities.
• Defence and commodities mutual funds can witness periods of strong gains as well as volatility within the same year, depending on external factors.

Performance of Defence and Commodities Mutual Funds

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• Over the past year, commodity-focused mutual funds have achieved significant gains, with returns ranging from 80% to 85%. Notable funds include:
  • LIC MF Gold ETF FoF (82.17%)
  • Quantum Gold Savings Fund (85.26%)
  • Aditya Birla Sun Life Gold Fund (83.34%)
  • SBI Gold Fund (84.02%)
• Defence-focused mutual funds have also posted solid gains, with returns ranging from 42% to 48%. Notable funds include:
  • Motilal Oswal Nifty India Defence Index Fund (47.46%)
  • Aditya Birla Sun Life Nifty India Defence Index Fund (47.04%)
  • Groww Nifty India Defence ETF FoF (45.98%)
  • HDFC Defence Fund (42.25%)

Risks and Considerations

• Commodities mutual funds can be volatile, with returns influenced by factors such as inflation, supply-demand imbalances, and disruptions in global supply chains.
• Defence mutual funds can experience sharp rallies followed by corrections, depending on government spending, policy push for indigenisation, and long-term defence orders.

Investment Strategy

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• Defence and commodities mutual funds are better suited as tactical or satellite allocations rather than core portfolio holdings.
• Investors should consider investing only a small portion of their money in these sectors to take advantage of specific opportunities.
• A diversified portfolio through broader equity or flexi-cap funds should form the foundation, while commodities or defence funds can be considered for limited exposure if one has a higher risk appetite and a long-term view.

Best Practices

• Investors should assess their investment goals, risk tolerance, and market outlook before investing in defence or commodities mutual funds.
• They should also consider their time horizon and whether they prefer short-term gains or long-term growth.
• Investors should take help from financial analysts and track historical performance to make an informed decision.