Commodity Funds

To understand what is a commodity fund, it is necessary to understand what are commodities. Commodities refers to a very broad set of assets, including gold, silver, oil, sugar, corn, hog, other agricultural produce, and other natural resources. These are normally dealt on commodities exchanges. There are specific exchanges for dealing with commodities such as tea, coffee, metals etc. Well known amongst these is the London Metal Exchange. But all these are basically commodities.

Therefore, commodity funds are a special type of mutual funds that invest in commodities on commodities exchanges, or may invest in businesses that are focused on specific kinds of commodity funds. More specifically, commodity fund definition would imply focus on a specific commodity. For example gold commodity funds, oil commodity funds, or agriculture commodity funds are commodity funds specifically focusing on one commodity, i.e., gold, oil, or agricultural produce respectively. There may be some commodity funds that cover a group of such commodities such as agricultural commodity funds, where under investments may be in soy, corn, sugar, hogs, etc.

Investors also have choice of derivatives of these commodity funds such as long only commodity funds, or long short commodity funds. Both open end and close end commodity funds are there. Like any other mutual funds, there may be entry or exit load, and there may be no load commodity funds as well.

Investing through commodity funds is better than investing in commodities directly. This is because investors get a wider selection of commodity funds to choose from, and thereby diversify their portfolio, and reduce risks. There is a genuine holding of the underlying asset involved. Many individual investors desirous of participating in commodities markets are unable to do so because they do not have adequate funds to purchase minimum quantities of the commodities, nor can they take possession of such commodities due to storage and stocking problems. Commodity funds offer them an opportunity to invest and make profits from investments in commodities markets. Investors can invest smaller amounts, and still make profits. Many of the commodities are perishable, and it is difficult to forecast production of commodities with certainty, as crops could get damaged due to natural disasters. Therefore, investors in commodity markets should be aware of risks associated with each commodity underlying the commodity fund that he or she is investing in.

Recent spurt in commodity prices has brought commodity funds and commodity mutual funds into focus. Both these terms are used synonymously. The difference is commodity mutual funds cover a wider set of underlying asset, while commodity fund focuses only on one type of asset.

Commodity funds therefore collect huge amounts from investors, buy the commodity, take possession of these commodities, hold them for specific length of time, and sell them for profits. Since inflation and prices of commodities go hand in hand, investment in commodities is considered as a way to counter inflation. Investors can therefore choose such commodity hedge funds that target inflation.