Get Diversity With Commodity Mutual Funds
For people looking to diversify their investment portfolios, commodity mutual funds offers a nice an interesting way to do so. Previously, investing in commodities was not feasible for small investors as investments in commodity markets need to be huge. This is because commodities markets required investors to put in $50,000 or even $100,000 in some cases, at one go. On top of this, there was 3% to 4% asset fees, and cut form the profit to the tune of 20%.
But with commodity mutual funds, even retail investors can invest in this exciting market. Investing in commodities acts as hedge against inflation. This is due to the fact that, whenever inflation rises, the prices of the commodities also rise. When demand for the goods rises, the prices of such goods also rise. This leads to the rise in prices of the commodities used to produce such goods. This is in contrast to the stock prices, where the prices fall with inflation. Commodity mutual funds are for those investors who are looking for long-term growth, as against short-term benefits.
Various commodities like grains, livestock, cotton, oil, sugar, coffee, crude oil, etc. are traded on exchanges. Most investors in commodity markets trade in future contracts, commonly known as futures, which means that the deal is done for a future delivery date, at an agreed price. As opposed to this, spot trades are done for immediate delivery, where the buyers take the possession for the goods immediately. Most traders trading on the future market sell the commodity before the contract expires, and never take possession of the commodity. Such investors try to make money on the relative price difference in the commodity over a period of time. This acts as a double-edged sword, as many investors are known to earn a lot when their estimates for higher prices in the future come true. However, an investor may also lose a great deal of money if the price of the commodity actually falls in the future.
As commodities markets are for sophisticated investors, commodities mutual funds provide a relatively simpler and safer way to invest in the commodities markets. Oppenheimer Real Asset Fund (QRACX) and the PIMCO Commodity Real Return Strategy (PCRAX) fund are the two good funds available with which you might consider investing. Goldman Sachs Commodities Index (GSCI) and the Dow Jones AIG Commodity Index (DJ-AIGCI) are the two, most common commodity indexes. These two indexes are different in a way that GSCI over weighs the appropriate commodity sector (e.g. energy, metal etc.); while the DJ-AIGCI takes into factor both production and liquidity when deciding weights. But investors should take care that commodities mutual funds, just like other mutual funds, carry a risk factor with them. However, with the rising prices of all the commodities in general, commodity mutual funds can not only hedge out inflation, but can also lead to greater earnings, in a relatively safer way.
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