The ongoing conflict between the United States and Iran has introduced new uncertainty into global financial markets, causing significant fluctuations in equities and commodities. During times of geopolitical tension, investors often turn their attention to sectors that could benefit from supply disruptions and higher resource prices. However, is this the right moment for retail investors to think about investing in defence or commodities mutual funds?
Commodity and defence mutual funds typically perform in cycles rather than providing steady annual returns. Over a year, their performance often correlates closely with broader economic and geopolitical developments.
In the past year, most commodity-focused mutual funds have achieved significant gains. Funds such as the LIC MF Gold ETF FoF (82.17 percent), Quantum Gold Savings Fund (85.26 percent), Aditya Birla Sun Life Gold Fund (83.34 percent), and SBI Gold Fund (84.02 percent) have produced returns mainly in the range of 80 to 85 percent during this period.
On the other hand, defence-focused mutual funds have also posted solid gains, though slightly lower than commodity funds. Schemes such as the Motilal Oswal Nifty India Defence Index Fund (47.46 percent), Aditya Birla Sun Life Nifty India Defence Index Fund (47.04 percent), Groww Nifty India Defence ETF FoF (45.98 percent) and HDFC Defence Fund (42.25 percent) have delivered up to around 48 percent returns over one year.
Commodities mutual funds
Commodities, for instance, often see price movements driven by factors such as inflation, supply–demand imbalances, or disruptions in global supply chains. During such periods, commodity prices can spike as demand rises or availability becomes constrained.
Akshat Garg, Head – Research & Product, Choice Wealth, said, “When inflation rises or global commodity prices rally, these funds can perform very well. However, during periods of weak demand or falling commodity prices, returns can remain subdued.”
Defence mutual funds
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Defence mutual funds are sectoral funds focused on companies linked to defence manufacturing and technology. Their performance often depends on government spending, policy push for indigenisation, and long-term defence orders. While the sector has strong structural potential in India, it can also experience sharp rallies followed by corrections.
Sameer Mathur, MD and Founder of Roinet Solution, said, “Defence mutual funds generally benefit during phases of heightened geopolitical tensions or when governments increase spending on defence and security. However, their performance can moderate if defence budgets slow down or if global security dynamics shift.”
This shows both commodities and defence-focused funds can witness periods of strong gains as well as volatility within the same year, depending on how these external factors evolve.
What should investors do?
For investors, these funds are better suited as tactical or satellite allocations rather than core portfolio holdings. This means investors should not make commodities and defence mutual funds the main part of their portfolio. Instead, they should invest only a small portion of their money in those sectors to take advantage of specific opportunities. The bulk of their investments should remain in more diversified funds meant for long-term goals.
“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,” said Garg.
Echoing similar views, Mathur said, “The decision to invest in commodities or a defence mutual fund depends on your investment goals, risk tolerance, and market outlook. Commodities can offer diversification and a hedge against inflation, but they can also be volatile. On the other hand, defence funds may provide stability and growth potential, especially during times of geopolitical tension.
Besides, investors should also assess the time horizon and whether they prefer short-term gains or long-term growth. They must take help from financial analysts and may track their historical performance to make an informed decision.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.