Commodities are goods that are traded in exchange of other products that hold similar value for the exchange. Across the globe, several commodities are traded regularly. These commodities are valued quite high because of their commercial value and their rising demand. Some of the commodities that are traded are gold, precious metals, food grains and coffee.
The commodities traded in the international and domestic market provides investors the ability to make commodity investments. The commodities which are traded are subjected to the demand and market prices that regulate the commodities' trade.
A commodity mutual fund is a fund that invests in the trade of a specific commodity. This provides investors with the ability to earn returns depending on the performance of the commodities in the market. These funds specialize in investing in a specific product. Any fluctuation in the price of the commodities will directly impact the returns obtained on the transaction. Commodity funds are excellent ways to diversify your stock market investment portfolio.
Suppose an investor is planning to invest in commodity mutual funds. In that case, they should have a clear understanding of how the commodity market functions and the risks involved and the benefits of investing in commodity mutual funds.
Some of the types of commodity mutual funds are:
- Basic true commodity funds:
These funds invest in commodities like metals that are mostly physical assets. The risks involved in basic true commodity funds are high as they are subject to fluctuations in the market rates. The date for physical delivery of the commodity is pre-defined in these funds.
- Natural resources funds:
These funds mostly invest in organizations or companies which handle natural resources or natural commodities like minerals, petroleum, gold, silver, oil, etc.
- Index funds:
They work with a standard market rate as their benchmark and aim to match the same or keep up with the changing market trends.