Equity vs Commodity: Key Differences, Risks, Returns & How to Choose

Understanding the difference between equity and commodity is crucial for mutual fund investors aiming to build a well balanced portfolio. Equity represents ownership in a company and offers growth through capital appreciation and dividends, while commodities are physical goods like gold, crude oil, and wheat, whose prices fluctuate based on global supply and demand. Both asset classes behave differently in terms of risk, return potential, taxation, and diversification benefits. This guide explains how equities and commodities work, their suitability for mutual fund investors, and how to choose based on your risk profile and financial goals.

Key Takeaways

• Equity means ownership in a business, commodity represents a physical asset like gold or crude oil.
• Returns in equity accrue from capital appreciation and dividends, commodity returns arise from price movements.
• Both asset classes are accessible to mutual fund investors via equity funds, gold funds, ETFs, and multi asset funds.
• Diversification across equity and commodity exposure can help reduce portfolio level risk.
• Always consider expense ratio, exit load, risk factors, and taxation before investing.
• For latest tax rules, investors are advised to refer to the Kotak Tax Reckoner.

What is Equity?

Equity simply means ownership. When you invest in equity either by buying shares directly or through a mutual fund you become a part owner of a company. This ownership entitles you to a share in the company’s profits and growth, and potentially its dividends.

Just like owning a house makes you a homeowner, owning a stock or investing in an equity mutual fund makes you a part owner of businesses.

The value of your ownership in a company is called shareholder equity. It is calculated as: Total Assets – Total Liabilities = Shareholder Equity.

In case the company winds up, equity is what remains after all debts are paid this is what belongs to the shareholders.

How Equity Works, Equity represents the residual value of a business after all liabilities are paid. It is calculated as:

• Equity = Total Assets – Total Liabilities

If a company sells all its assets and pays off its debts, what is left is the equity value that belongs to its shareholders.

What is a Commodity?

Commodity refers to a standardised, physical asset such as gold, crude oil, natural gas, or agricultural produce like wheat. These goods are widely used in industrial production and are valued based on global supply and demand dynamics.

Unlike equities, which represent ownership in companies, commodities are tangible assets whose prices can fluctuate due to factors like geopolitical events, weather patterns, inflation, and currency movements.

From an investment perspective, commodities behave differently than equity or debt instruments. Commodities may enhance diversification in mutual funds and may provide a hedge during inflationary periods or equity market volatility.

As a retail investor, you can access commodities through:

• ETFs that track the price of commodity like gold etc.
• Fund of Funds (FoFs) that invest in commodity linked ETF.
• Multi Asset Allocation Funds that include a portion of commodity exposure, typically gold.

To understand how such investments work through mutual funds, especially in gold, read more on gold fund basics.

Equity vs Commodity: Key Differences Explained

Feature	Equity	Commodity
Nature	Represents ownership in a company or business	Physical goods like gold, crude oil, wheat, etc.
Returns	Generated from share price appreciation and dividends	Arise from price movements driven by global supply and demand
Risk Drivers	Company earnings, industry trends, macroeconomic factors	Geopolitical events, weather patterns, currency fluctuations and Macro factors.
Liquidity & Trading	Traded on stock exchanges with longer hours and higher liquidity	Traded on commodity exchanges via futures.
Volatility	Linked to corporate and economic cycles	Influenced by external and unpredictable factors
Access for Investors	Equities, equity mutual funds, index funds	Commodity ETFs, gold mutual funds, multi asset allocation funds

 

Market Structure & Instruments

The structure and instruments available in equity and commodity markets differ in terms of access, regulation, and product types:

1. Equity Market:

Investors can participate through stock exchanges (like NSE and BSE) by buying listed shares of companies. Other instruments include:

• Derivatives: Equity futures and options allow hedging or speculative positions.
• IPOs: Initial Public Offerings provide access to companies entering the public market for the first time.
• Mutual Funds: Investors can access equity markets through various mutual fund schemes.

2. Commodity Market:

Commodities such as gold, crude oil, and agricultural products are traded on regulated commodity exchanges (like MCX in India). Key instruments include:

• Futures & Options: Contracts to buy or sell a commodity at a predetermined price and date.
• ETFs & Commodity Mutual Funds: Retail investors can participate indirectly through Exchange Traded Funds or mutual funds that invest in commodity linked assets.

Liquidity & Trading Hours

Liquidity refers to how easily you can buy or sell an investment without affecting its price. Both equities and commodities are traded on regulated exchanges, but they differ in terms of trading hours and how quickly transactions happen.

• Equity Markets (like shares) usually offer higher liquidity. Stocks of large companies can be bought or sold quickly during regular market hours typically from 9:15 AM to 3:30 PM, Monday to Friday, on stock exchanges like NSE and BSE.
• Commodity Markets (like gold or crude oil) have different trading hours. For instance, MCX (India’s commodity exchange) allows trading from morning till late evening. Liquidity may vary depending on the commodity, and trades often happen via contracts (like futures), not direct ownership.

For mutual fund investors, these differences are managed by the fund manager. If you're investing in commodity based mutual funds or ETFs, the fund handles the trading and liquidity as per SEBI regulations, ensuring investor protection and transparency.

Risk & Return Comparison

When comparing equities and commodities both offer opportunities but with different risk return profiles:

• Equity investments (like stocks or equity mutual funds) are linked to company performance and economic growth. Over the long term equities have the potential to generate wealth through capital appreciation and dividends. However, they may also face short term volatility due to business cycles or market corrections.
• Commodities on the other hand, are influenced by factors like global demand supply shifts, geopolitical events, weather conditions, and currency fluctuations. This can lead to sharp price movements in the short term

For mutual fund investors the choice depends on their risk tolerance, time horizon and financial goals.

Taxation in India

Taxation of equity and commodity investments in India depends on the asset type, holding period, and mode of investment.

Investments in mutual funds or stocks are generally taxed under capital gains rules depending on how long they are held.

For a detailed understanding of applicable tax rates and conditions, investors are advised to  refer to the Kotak Tax Reckoner for the latest tax regulations.

Can I Invest Small Amounts in Commodities?

Yes, retail investors can start small by investing in commodity linked ETFs or mutual funds, including gold funds. These options typically come with low minimum investment amounts. If you prefer a phased entry, you can consider using a Systematic Transfer Plan (STP) from an equity or debt mutual fund into a commodity fund. This allows gradual allocation while reducing timing related risks.

Things to Consider While Choosing Between Equity Market and Commodity Market

• Expense Ratio: Always check the expense ratio in mutual fund schemes to understand how much is charged annually for managing your investment. A lower expense ratio can improve your net returns over time, especially in long-term investments
• Exit Load: Some funds may charge an exit load if redeemed before a specific holding period. It’s important to read the scheme's offer document
• NAV in Mutual Fund: The Net Asset Value (NAV) is essentially the price at which you buy or sell units of a fund. It reflects the current market value of the underlying assets. Monitoring the NAV in mutual fund investments helps you stay informed about how your fund is performing
• Diversification: Equities and commodities respond differently to market cycles. Including both in your portfolio supports diversification in mutual funds, helping reduce overall risk and smoothen returns across asset classes.

Conclusion

Equities and commodities represent two distinct asset classes one rooted in ownership of businesses, the other in the value of physical goods. For mutual fund investors, understanding the fundamental differences between them is essential for building a well diversified portfolio. Equities can help generate long term capital appreciation through company performance, while commodities, especially gold, can offer protection during inflation or market stress. By using professionally managed solutions such as equity mutual funds, gold ETF, and multi asset allocation funds, investors can align their choices with risk appetite, investment goals, and time horizon all under SEBI regulated frameworks.

Choosing between equity and commodity mutual funds also brings up the classic debt vs equity dilemma. While equity offers long-term growth, debt mutual funds provide relative stability. Commodities can act as a balancing asset depending on your risk appetite.

FAQs

1. What is the main difference between equity and commodity?

Equity represents ownership in a company, giving investors a stake in its profits and growth. Commodities are physical goods like gold, oil, or wheat, traded for their market value.

2. Which is riskier, equity or commodity?

Both equities and commodities carry inherent risks. Commodities tend to exhibit volatility due to global supply demand shifts, weather events, and geopolitical developments. Equities, on the other hand, are influenced by company performance and macroeconomic cycles. For mutual fund investors, risk suitability should be assessed based on individual financial goals, investment horizon, and risk appetite. Always refer to the scheme’s riskometer.

3. How are equities and commodities taxed in India?

Investments are taxed based on the type of underlying assets and the holding period, as per capital gains provisions. For the most updated tax guidelines, investors are advised to refer to the Kotak Tax Reckoner.

4. Do commodities protect against inflation?

Certain commodities especially gold are commonly used as inflation hedges. For mutual fund investors, exposure to gold through SEBI regulated instruments like gold ETFs may help manage portfolio risk during inflationary periods.

5. Can I invest small amounts in commodities?

Yes, You can invest in commodity-focused mutual funds like ETFs with relatively low minimum investment amounts. Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) offer accessible options to enter commodities gradually.

6. Is a Systematic Transfer Plan useful between equity and commodity funds?

Yes. A Systematic Transfer Plan (STP) lets you move funds from an equity or debt mutual fund to a commodity linked fund at regular intervals. This approach helps reduce timing risk and supports disciplined investing, especially during volatile market conditions.

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision. This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Asset Management Company or its employees. The company makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Company, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.