The media pays a lot of attention to commodities. Oil, gold, maize, soy, and hog prices are all in the headlines almost every day. Commodity mutual funds allow nearly every investor to participate in the commodities markets, despite the fact that investing in commodities is a rather sophisticated effort.
Different fund types available out there
The term “commodity fund” encompasses a number of different forms of investments. These are some of them:
- Commodity funds are mutual funds that invest in commodities. These funds are actual commodity funds in the sense that they hold direct commodity positions. A gold fund, for example, would be a real commodities fund because it contains gold bullion.
- Futures-Holding Commodity Funds A considerably more popular mutual fund method for investing in the commodities markets is to hold commodity-linked derivative contracts. Most investors aren’t interested in receiving pigs, corn, oil, or any other product; instead, they seek to benefit from price fluctuations. Buying futures contracts is one approach to accomplish this goal.
- Funds for Natural Resources Natural resource funds are funds that invest in firms that operate in commodity-related industries such as energy, mining, oil drilling, and agriculture. They give exposure to the commodities markets by proxy, even if they do not hold genuine commodities or commodity derivatives.
- Funds that combine several types of investments Some mutual funds invest in both physical commodities and commodity derivatives. Gold funds, for example, may contain both bullion and futures contracts as underlying holdings.
Various Investment Methodologies
Commodity funds, in addition to a range of forms, provide a number of investing techniques, including active and passive management. In order to outperform a benchmark index, active portfolios purchase and sell. Passive portfolios aim to mimic the performance of a benchmark index. Index funds and exchange-traded funds can be used to apply passive strategies (ETFs).
The Benefits and Drawbacks of Investing in Commodity Funds
Commodities can help diversify your portfolio. Investing in futures contracts or real commodities adds a portfolio component that isn’t a stock, bond, or mutual fund that invests in stocks and/or bonds. Commodities have historically had a poor correlation with traditional equity markets, which means they don’t necessarily change in lockstep with market moves. When it comes to adding diversification to a portfolio, many investors prioritize having this low correlation.
Commodities have upside potential as well. Supply and demand govern the raw resources used in building, agriculture, and a variety of other sectors. When demand increases, so do prices, resulting in a return for investors. Finally, commodities provide an inflation hedge.
Things to keep in mind before you invest
The commodities markets are notoriously volatile, with dramatic price fluctuations and extended lulls. Prices may fluctuate from all-time highs to all-time lows in a matter of days. Research the price of gold over the last 30 years and the price of copper in 2008 to get a better idea of the spectrum of price swings.