Commodity Mutual Funds
Commodity mutual funds are interesting because they are promising and worthwhile. These are used by many investors to branch out and expand their investment portfolios, aside from the usual bonds and stocks. They are also looked upon as protection against price increases (or inflation), because when prices go up, so do these funds. This development makes them very appealing to most investors.
These funds are for those who invest in certain designated real assets or their derivatives (like future contracts – instruments that smooth the progress of investment in commodities). The commodities are traded to maximize profits.
In a way, commodity mutual funds are scaled-down versions of hedge funds. Hedge funds are for big-time investors who can pool in excess of a million dollars for the purpose of commodity trading.
The (very basic ) idea with hedge funds is that you have an investment in both directions, or two opposing contracts, so whichever way the market goes you can be in. The trick is to catch the swing early, close the losing contract and ride the winning contract.
But what are commodities? Commodities are products that are cultivated or come from the earth. These are products like metals, minerals, grain, livestock, sugar, oils, cocoa, coffee and cotton. Other common commodities that are traded are wheat, hog bellies, crude oils, cattle and poultry.
In order to be successful trading futures contracts you have to have a knack for predicting the future.
That’s not meant to be funny, but it is the truth, either through exhaustive research into the commodity itself, supply and demand, seasonal needs, breaking news stories, natural events or disasters, weather systems or studying graph and chart patterns.
With commodities you can make a profit in either direction, as long as you correctly predicted where the price will be in the future.
People trade commodity mutual funds for a stable future. With future contracts, investors in the commodity market side of the trade hand over their ends before the expiration of the contract. The investor does not really have to do the physical delivery of the commodity itself.
The investor is only interested in the amount of money that he can make from the investment, depending on the change in price of the commodity mutual funds or difference from the time he purchased till the time he sells.
Commodities have an expiration or delivery date that is part of the contract, so although you can sell or buy anytime before the delivery date, if the delivery date comes and you are upside down, you still have to deliver. This is where many of the losses occur.
Another concern is how it reacts with inflation. Commodities are tied to the economy. When inflation is present, the product is surely influenced. A number of commodities are consumed without batting an eyelash – the prices are determined by the cost of living. Because of this, commodity mutual funds are always swinging during inflation.
The cost of borrowing is affected to a great extent by the interest rates. The higher the interest rate, the more costly for a company to make a loan. In turn, the increase in the interest expense decreases the earnings per share for each client, so there is no sure amount.
The natural resource mutual funds, oil companies, and other energy funds make up the bulk of the commodity mutual funds. Companies handling these products continue to grow whenever there is a product boom.
It’s really important to fully understand the operation of commodity mutual funds before investing in them. Commodities trading may sound interesting and alluring, but these are complicated markets and they are not as familiar to most investors compared to the stock market or the bond market.
Before investing, read the fund’s prospectus and annual reports. Be aware of the commodities and the role each plays in your portfolio versus other investments. Always be aware of the unpredictable nature of commodities markets, and limit holdings to only a small percentage in the total portfolio.
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