Energy Funds help investors ride the oil price rebound

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MUMBAI: A rebound in oil prices has pushed energy and natural resources funds towards the top of the mutual fund rankings. Oil prices have staged a comeback over the past year with WTI crude moving from 34 dollars per barrel to about 66 dollars per barrel. In April 2020, when the first lockdowns went into effect around the world, WTI prices had briefly turned negative. However, oil has rallied with the reopening of major economies around the world along with other commodity stocks such as metals.

DSP Natural Resources and New Energy Fund invests about 22% of its assets in global funds investing in international energy stocks such as Chevron, Total and Royal Dutch Shell. The remaining corpus is largely invested in domestic metal stocks and energy companies. Among domestic stocks, Tata Steel is its largest exposure at 11.57% followed by Jindal Steel and Power at 9.58% and Hindalco at 6.58% according to data from Value Research as of 31st May. The fund has delivered a return of 117.22% over the past year compared to 45.6% for the S&P BSE Energy Index and 70.26% for the S&P BSE 100.

Tata Resources and Energy Fund, another sector fund which focuses on domestic metals, energy and cement stocks has delivered 97.16% over the past year. ICICI Prudential Commodities Fund was launched in October 2019 with a similar focus. It has delivered 177.91% over the past year and 63.78% CAGR since inception.

Financial experts do not generally recommend having more than 10-15% exposure to thematic mutual funds in one’s portfolio. Economic cycles are transient and there can be long periods of underperformance from such concentrated thematic funds. Apart from mutual funds, Indian investors can also invest in energy stocks and ETFs listed abroad to capture the rebound in energy. Due to India’s status as an oil importer the universe of energy stocks, particularly oil producers, is limited in the domestic market. Indian residents are permitted to invest up to USD 250,000 per year in international stocks under the Liberalised Remittance Scheme (LRS).

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