Long-term high risk takers can consider getting in, but in a staggered manner.
It's difficult days for those investors who bet on the global commodities theme.
The DSP Blackrock World Mining Fund crashed 24% over the last one year. Its annualised loss for the 2 and 3 year holding period is also placed at 18% and 14% respectively. The country-specific funds, catering to resource-rich nations, have also been affected by the crash in commodity prices. For example, the annualised losses for 1, 2 and 3 years holding period for HSBC Brazil Fund is 15%, 16% and 11% respectively. Here too, the NAV of the growth option is below par
What should investors do with these funds now? Should existing investors book losses and move out or should they hold on to them, hoping for a recovery. Should new investors avoid them or should they use the current turmoil as an opportunity to get in slowly? The answers depend on the time horizon you have.
Short term
Experts want existing investors to move out and new investors to avoid commodities based funds altogether if their time horizon is short term (less than 1 year). The latest round of commodity price crash started only a few months ago and may continue for some more time. The crash is also spreading from crude oil to other commodities and the global macro-economic situation is not pointing towards a quick recovery. Since the major part of the world is still slowing down, the bear market in commodities may continue for some more quarters. The US fed rate hike and the resultant strengthening dollar is another factor that will keep the commodities market under leash.
Domestic mutual funds--equity and debt-should continue to do well in the short term. The fall in global commodity prices are helping India to improve its macro-economic situation by reducing its fiscal deficit and current account deficit. It is also helping it to rein in inflation, thereby paving the way for faster interest rate cuts. Should this money be shifted to equity or debt? Investors won't be able to recoup losses by shifting to debt, so let them take the equity route. The investors are assumed to be risk takers as they would not have invested in global commodities funds otherwise.
Long term
Long term investors (5 years plus holding period) have to think differently. Commodities prices will stabilise and start moving up when the global economy starts picking up again. The prices of several commodities have also gone below their total production costs. The cost of US shale, the main reason behind the current price crash, is estimated to be between $40 and $60 and the current price is at the lower end. Though oil can go down further in the short term, these low prices are not sustainable in the long term. Similar is the situation for most other commodities as well. This means that short term volatility could be harnessed by the long term investors. The contrarian investors should be able to weather the short-term volatility. Experts feel that these short term risks are worth taking. Since the global commodities markets are already down, the risk is significantly lower and the risk reward ratio is favourable for long term investors. Though it makes sense to shift some money from domestic equity markets to global commodities, don't do it in one go. Go for SIP or STP routes covering up to one year.
Don't forget the tax angle
Remember these global funds are not defined as `domestic equity funds' and therefore, not given any preferential tax treatment. The returns generated by selling before 3 years will be treated as short term capital gain and taxed as per your tax slab.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
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