Metals & Mining Mutual Funds: A Smart Way to Invest in the Commodity Boom

Nov 02, 2023 / Reading Time: Approx. 15 mins

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Metals & Mining Mutual Funds: A Smart Way to Invest in the Commodity Boom

The metals and mining sector performs as the backbone of India's industrial and infrastructural growth. It is an essential contributor to achieving Sustainable Development Goals (SDGs) and continued economic development.

India has a reasonable edge in the production and conversion costs of steel and alumina, as well as in the production of essential minerals, which has a notable impact on environmental sustainability, social inclusion, and economic development.

The metals and mining companies need to overcome various challenges, including meeting rising ESG and social expectations, transitioning into low-carbon value chains, geopolitical risks, and shifting towards digitalisation, among others, to fully leverage the potential of the sector.

Minerals are finite, non-renewable natural resources that are essential to many sectors as raw materials and have the potential to make a major contribution to the SDGs' accomplishment. The metal and mining industry works hard to actively modernise and adjust to regional and global changes in order to become sustainable and future-proof.

About Indian Metal Industry

Use of metals has been one of the main drivers of industrialisation. From steel in the automotive industry to cement in the construction sector, this sector supplies vital raw materials to many other industries. Thus, the metals industry's growth is crucial for any nation's overall industrial development.

Historically, steel has been the most valuable metal. Steel is both a raw material and an intermediate product, therefore its production and consumption are commonly used as indicators of a nation's economic development.

With a production of 121.29 MT of finished steel and 125.32 MT of crude steel in FY 2022-2023, India is the second-largest producer of crude steel in the world. From 105 MT in FY 2022 to 119 MT in FY 2023, steel consumption increased by more than 11%. The steel sector hopes to reach 300 MT of production capacity by 2030 and has substantial growth potential.

In the modern economy, the metal industry plays a vital role as it supports the manufacturing and construction sectors, increases GDP, provides employment opportunities, and maintains foreign exchange reserves through exports.

Its performance is strongly correlated with the state of the economy; it prospers in times of expansion and encounters difficulties in times of recession. As the demand for metals continues to soar, investors are presented with unique opportunities to capitalise on this lucrative market.

About Indian Mining Industry

Since minerals are valuable natural resources that are necessary raw materials for many basic industries, the expansion of the mining sector is critical to a country's overall industrial development.

Critical minerals are essential natural resources that are vital for a variety of industries, including technology, manufacturing, and clean energy, for example - lithium, nickel, and cobalt.

[Read: Top 5 Mutual Funds with High Exposure to EV Revolution]

In contrast, minerals that are found deep inside the Earth's crust are referred to as deep-seated minerals, and they frequently pose more difficulties for exploration and extraction than minerals that are found closer to the surface - Gold, copper, and diamonds are illustrative examples of deep-seated minerals.

In terms of mineral fuels like coal and lignite, as well as metallic minerals like bauxite, chromites, iron ore, and lignite, India is essentially self-sufficient. India is the world's second-largest coal producer. In addition to significant potential for future subsurface deposit discoveries, there is a great deal of room and opportunity for expanding the capacity of coal and iron ore mines.

Manganese Ore India Limited (MOIL) produced 13.02 lakh tonnes of manganese ore in FY 2022-2023-a 6% increase over the previous year and the company's second-highest production since its inception.

India is ambitious in its adoption of clean energy technology and wants to protect its vital mineral supply chains. The important minerals sector emphasises how urgent it is to involve the private sector, as demonstrated by India's high reliance on foreign sources for minerals like cobalt and lithium.

The fact that India currently imports all of the essential minerals it needs from nations like China, Russia, Australia, South Africa, and the US highlights the need for change. These vital minerals, which include tantalum, lithium, cobalt, nickel, niobium, and beryllium, are important for a variety of businesses.

[Read: 5 Mutual Funds to Benefit from the EV Battery Stocks]

Through the introduction of significant legislative measures and regulatory interventions in the areas of land availability, levy of duties, and auction procedures, the government of India endeavours to foster the growth of the mining and metals industry.

  • Under the Union Budget 2023-24, the government allocated Rs. 70.15 crore (US$ 8.6 million) to the Ministry of Steel. India's steel production is estimated to grow by 4-7% to 123-127 MT in FY24.

  • The government plans to monetise assets worth Rs. 28,727 crore (US$ 3.68 billion) in the mining sector over 2022-25. The Ministry of Mines of the Government of India has signed MoUs with different nations.

As the global economy is expected to rebound in this post-pandemic era, demand for metals and minerals is increasing. As a result, investors are also interested in companies that are developing technologies to improve the efficiency and sustainability of the metals and mining sector.

However, direct equity investment in stocks of metals and mining companies may not be suitable for every investor based on their risk profile, investment horizon and goals.

Thus, investors who want to take advantage of this evolving industry's growth while avoiding the high risk associated with stocks may consider investing in mutual funds. Investors can select the best mutual funds that have a significant allocation to metals and mining stocks.

[Read: The 4 Key Market Trends that Could Drive Mutual Fund Growth]

Here are the top 5 mutual funds with high exposure to the metals and mining sector:

#1 DSP Natural Resources & New Energy Fund (Sectoral Fund)

DSP Natural Resources & New Energy Fund invests predominantly in equity and equity-related securities of companies domiciled in India whose pre-dominant economic activity is in the - discovery, development, production, or distribution of natural resources, viz., energy, mining, etc; Plus, alternative energy and energy technology sectors, with emphasis given to renewable energy, automotive and on-site power generation, energy storage and enabling energy technologies.

The scheme invests across market cap, and as of September 2023, it holds 53.62% allocation in large caps, 12.08% allocation in mid-caps and 6.90% in small caps.

DSP Natural Resources & New Energy Fund - Allocation to Metal & Mining Stocks

Stocks Holding %
Hindalco Industries Ltd. 9.99
Tata Steel Ltd. 7.95
Jindal Steel & Power Ltd. 7.76
Coal India Ltd. 6.83
NMDC Ltd. 5.02
Hindustan Zinc Ltd. 2.26
Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme holds a maximum exposure of 9.99% in stocks of Hindalco Industries Ltd., which is one of India's biggest aluminium manufacturing companies and the world's largest flat-rolled products player and recycler of aluminium. It is engaged in producing and selling aluminium sheet and light gauge products in North America, South America, Europe, and Asia.

The scheme also carries an allocation of 7.95% to Tata Steel Ltd. and 7.76% to Jindal Steel & Power Ltd. which are the market leaders in the metals sector. The scheme's overall allocation to metals and mining stocks accounts for 39.81% of its total assets.

#2 ICICI Pru Commodities Fund (Thematic Fund)

Launched in October 2019, ICICI Pru Commodities Fund invests predominantly in equity and equity-related securities of companies engaged in the engaged in commodity and commodity-related sectors. The scheme currently has an AUM of Rs 1,325.26 crore and is benchmarked against NIFTY 50 TRI.

Bear in mind that the scheme does not carry a long performance track record; thus, investors may consider their suitability before investing in it.

ICICI Pru Commodities Fund - Allocation to Metal & Mining Stocks

Stocks Holding %
Tata Steel Ltd. 8.59
JSW Steel Ltd. 6.63
Jindal Steel & Power Ltd. 5.67
Hindalco Industries Ltd. 3.03
Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research)
 

As of September 30, 2023, the scheme invests 48.43% in large caps, 26.13% in mid-caps and 20.30% in small-cap stocks.

The fund holds maximum exposure in stocks of companies like - Tata Steel Ltd., which is involved in the steelmaking business, which includes raw material and finished products. Hot-rolled (HR), cold-rolled (CR), coated coils and sheets, coated steel coils and sheets, precision tubes, tire bead wires, spring wires, bearings, galvanised iron (GI), wires, agricultural and garden tools, and conveyance tubes are among its products.

The scheme also invests in leading metals and mining manufacturers like JSW Steel Ltd., Jindal Steel & Power Ltd. and Hindalco Industries Ltd. Currently, the overall exposure to metals and mining stocks accounts for 23.93% of the scheme's assets.

#3 - SBI Magnum Comma Fund (Thematic Fund)

SBI Magnum Comma Fund is categorised as a thematic scheme investing predominantly in a portfolio of stocks of companies engaged in the commodity and commodity-related businesses. Currently, the scheme holds an AUM of Rs 476.48 crore.

As of September 2023, the fund has a 47.41% allocation in large-cap stocks and 11.72% in mid-cap stocks, whereas 31.75% in small-cap stocks. Do note it has a higher allocation to small-cap stocks, which are highly risky and sensitive to market fluctuations.

SBI Magnum Comma Fund - Allocation to Metal & Mining Stocks

Stocks Holding %
Coal India Ltd. 8.98
Tata Steel Ltd. 7.51
Hindalco Industries Ltd. 4.34
Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research)
 

The scheme has an overall allocation of 20.83% to metals and mining stocks.

The highest exposure of 8.98% is in Coal India Ltd., which is the single largest producer of coal and coal-based products in the world. The company's portfolio of products includes coking coal, semi-coking coal, non-coking coal, hard coal, washed and beneficiated coal, coal fines, heavy oil, and coke.

In addition, the scheme has significant exposure to Tata Steel Ltd. and Hindalco Industries Ltd.

#4 Tata Resources & Energy Fund (Sectoral Fund)

Tata Resources & Energy Fund endeavours to create a portfolio by investing predominantly in equity/equity-related instruments of the companies in the resources and energy sectors in India. The scheme holds an AUM of Rs 303.42 and is benchmarked under Nifty 50 TRI.

Tata Resources & Energy Fund - Allocation to Metal & Mining Stocks

Stocks Holding %
Tata Steel Ltd. 3.33
Jindal Steel & Power Ltd. 3.24
Hindalco Industries Ltd. 2.11
Coal India Ltd. 1.94
Vedanta Ltd. 1.46
Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research)
 

In terms of metals and mining stocks, the scheme holds a high allocation of around 3.33% in Tata Steel Ltd. and Jindal Steel & Power Ltd. which is an Indian steel manufacturer. Iron & Steel, Power, etc., are the Company's business segments.

The scheme has an overall allocation of 12.09% to metals and mining stocks. As of September 2023, the fund has a 58.23% allocation in large-cap stocks and 28.59% in mid-cap stocks, whereas 10.83% in small-cap stocks.

#5 ICICI Pru Quant Fund (Thematic Fund)

Launched in 2020, ICICI Pru Quant Fund invests in equity and equity-related securities of companies engaged in manufacturing themes. The fund holds 68.11% allocation to large-cap stocks and 24.95% in mid-cap stocks, as of September, 2023.

However, since the scheme has been launched recently, it does not carry a long performance track record. Thus, investors may consider their suitability before investing in it.

ICICI Pru Quant Fund - Allocation to Metal & Mining Stocks

Stocks Holding %
Jindal Steel & Power Ltd. 4.69
JSW Steel Ltd. 3.99
Coal India Ltd. 3.37
Data as of September 30, 2023
(Source: ACE MF, data collated by PersonalFN Research)
 

The overall allocation to Automobile stocks is around 12.05%, and the highest is in stocks of Jindal Steel & Power Ltd. The scheme also holds fair exposure to other stocks like - JSW Steel Ltd. and Coal India Ltd., which are the market leaders in the segment.

Although sectoral mutual funds could be a good diversifier to your portfolio, it takes at least a few years to reach their potential. Hence, investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their suitability.

What is the Outlook for Indian Metals and Mining Sector?

The outlook for the metals and mining industry in India is positive. The sector is expected to grow at a CAGR of around 7% over the next five years, driven by a number of factors:

  • Government Measures: The world at large is making significant investments in infrastructure projects, including those involving highways, bridges, and airports. This is increasing the demand for metals like copper, aluminium, and steel. With the National Mineral Policy 2019, the government hopes to establish India as a mining industry leader worldwide.

  • The Rise of Green Energy: The demand for metals is rising in tandem with the shift to sustainable energy. For instance, nickel is utilised in lithium-ion batteries, but copper is employed in solar panels and electric cars.

  • Supply Chain Disruptions:  Metal prices have increased as a result of supply chain disruptions brought on by the pandemic and the conflict between Russia-Ukraine. This has made metals and mining stocks more attractive to investors.

  • Technology Adoption:  In an effort to increase productivity and efficiency, the mining and metals sector is progressively using new technology. For instance, businesses are enhancing their operations through automation, AI, and big data analytics.

Apart from this, the low interest rates make commodities such as metals more attractive to investors, as they offer a potential for higher returns. Inflation is also driving demand for metals and mining stocks, as investors seek to hedge their portfolios against the rising cost of living.

All things considered, the metals and mining industry is ideally positioned to gain from several developments, such as the energy transition, infrastructure spending, cheap borrowing rates, and the global economic recovery. Future industry growth and its contribution to GDP growth in a post-pandemic environment are expected to be largely driven by both increasing exports and domestic demand.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

 


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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