Investing in the Rare Earths Mineral Value Chain? Understand its connection with Mutual Funds

These are sectoral/thematic schemes that invest in companies linked to rare earth elements (REEs) and strategic metals. They may also be structured as Exchange-Traded Funds (ETFs) rather than traditional mutual funds.

A rare earth metals or minerals ETF tracks a specific index and provides exposure to multiple REM companies, usually involved in:

Studies show that India has around 6% of the world’s rare earth reserves. However, the current production is less than 1% of the global supply. Now, to increase production, the government has recently launched the National Critical Mineral Mission (2025). 

The aim? It is to increase exploration, mining, and processing of critical minerals within India. Additionally, 

• IREL (India) Limited (a government-owned company) is also setting up a new plant in Visakhapatnam to manufacture samarium-cobalt magnets in India.

• India has also formed Khanij Bidesh India Limited (KABIL) to acquire mineral assets abroad.

What does this show? India is moving from being only a “resource holder” to becoming an “active participant” in the rare earth supply chain. For investors, this transition phase may present an opportunity for investing in rare earth metals or minerals. 
 

Furthermore, you may seek the following potential advantages:

1. Full Value Chain Participation

When you invest in a mutual fund investing in companies linked to rare earth minerals, you do not invest in just one mining company. Instead, you seek to gain exposure to multiple companies involved in different stages of the rare earth industry. 

2. Portfolio Diversification Beyond Traditional Equities

These mutual funds provide exposure to a “specialised rare earth sector”. It may or may not move in line  with traditional industries like banking, FMCG, or IT depending upon different market circumstances. 

Reason? The drivers of this sector are different, which include:

• Electric vehicle demand

• Defence spending

• Clean energy expansion, and more

By adding such exposure, you can aim to reduce the concentration risk of your equity-heavy portfolio.

3. Strong Growth Potential (Due to EV and Defence Demand)

Rare earth elements are primarily used in:

• Electric vehicles

• Renewable energy systems

• Advanced defence equipment

If demand for these products increases, companies operating across the rare earth mineral value chain may potentially see higher revenues + improved earnings. When a strategic metals ETF or a rare-earth minerals ETF holds shares of such companies, its Net Asset Value (NAV) may consequently increase. 

Realise that investing in rare earth metals or minerals is a narrow theme that is still “new”. The sector has a limited number of listed companies and a short performance history.  As a result, investments are generally considered riskier compared to established sectors such as FMCG, banking, or healthcare. 

Additionally, some more disadvantages you must be aware of are:

1. Heavy Dependence on China

When it comes to the REM industry, China is the dominant supplier. It produces around 70% of rare earths and refines about 90% (Mention source). If China imposes export restrictions or supply limits, global supply chains can face disruption. 

This may:

• Increase raw material costs and

• Delay production for companies involved in electric vehicles and defence manufacturing.

If such companies are held by mutual fund schemes related to rare earth minerals, then it may negatively impact the fund’s NAV.

2. Sharp Price Swings

Prices of rare earth elements usually fluctuate due to:

• Supply-demand imbalances

• Policy changes

• Geopolitical tensions (say, US-China cold war escalation)

In periods of suppressed demand or political instability, a mutual fund investing in companies linked to rare earth minerals may experience high volatility compared to diversified equity funds.

3. Risk of Technological Substitution

“Technological progress” may reduce dependence on certain rare earth elements. For example, 

• Dysprosium (a rare earth metal) is currently added to permanent magnets used in electric vehicle motors.

• In times to come, manufacturers may start using alternative motor technologies such as induction motors.

• As a result, the demand for dysprosium could decline.

If these changes occur, then mutual funds holding stocks of such companies might underperform.

So now you know what mutual funds investing in companies linked to rare earth minerals are. These are thematic ETFs that usually track a rare earth index, such as strategic metals, lithium, uranium mining, and more.

Investing in such financial products may try to offer diversification benefits as the REM industry is relatively lesser correlated with traditional sectors like banking or FMCG. Also, in times to come, the industry may potentially benefit from strong growth potential. 

However, investments in mutual funds schemes related to rare earth minerals must be made after strictly analysing your risk appetite. The rare earth industry is still new and remains heavily dependent on China for processing and supply. Companies in this theme can face sharp price swings, policy risks, and higher volatility compared to other sectoral funds. 

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.