Commodity mutual funds
July 6th, 2009
Commodity mutual funds
The mutual funds are a financial instrument that has changed the economic future of the ordinary people for ever. Previously it was not possible for ordinary people to invest in commodities. It was a highly capital intensive game that ordinary people could ill afford. The mutual funds revolution has brought the democratization of investments in commodity markets also. By using the means of the commodity mutual funds even an ordinary person with modest means can get all the benefits of the commodity markets. Let us first try to understand a little economics about commodity market. If something comes from the earth or is grown on the earth then it is called as commodity. This definition means you can include oils, sugar, and cocoa. Grains, metals, minerals, livestock, cotton etc in commodities. The most interesting part of the commodities is that the prices of commodities go on increasing along with the inflation. The stocks markets react in opposite directions. This means the commodity offers you best possible hedging against the inflation. When inflation is on rise, the stock prices are down. This is the reason why commodity mutual funds are best hedging instruments. In commodity markets, future trading is a big business. There is lot of profit in this business. But the investments required are also heavy. The mutual funds are the only solution available with ordinary people to participate in commodity market Future contract is the way commodity market works. The commodity mutual funds invest in these future contracts. These futures are traded on exchanges. The total investments in these types of futures are to the tune of fifty percent. The rest of commodity fund money is generally invested in bond money to get some sort of stability. This also covers for the expenses of the commodity mutual funds. For the first time futures and options market is coming within the reach of the ordinary people in retail form due to commodity mutual funds. It is possible to hold portfolio of commodities as per your own mix. There are commodity mutual funds which are index funds. If you want, you can follow a particular index for security. Goldman Sachs Commodity index or GSCI is made up of twenty two different commodities. The proportion is as per their world consumption pattern. Thus energy has 55% weight age in the index. The agriculture commodities have 255weightage in this index. Oppenheimer Real Asset Fund QRACX is a well known commodity mutual fund. It tries to mirror the composition of futures hold as per GSCI index. The other famous commodity mutual funds are PIMCO. It has 35% energy futures investments only. Remember that GSCI will make this 55 %. The PIMCO is more interested in investments in industrial metals like gold. If the fee structure does not take away much of your profits, invest in commodity mutual funds.
Hedge Funds
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