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Questions to Ask before Investing in Commodity Mutual Funds

5 of 8 in Series: The Essentials of Commodities Trading

Before you invest in a mutual fund, you should gather as much information as possible about the fund itself, as well as about the mechanics of investing in the fund. You can get answers to these questions directly from the fund manager or the fund’s prospectus.

Here are some useful questions to help you zero in on the key points of mutual fund investing:

  • What is the fund’s investment objective? Different funds have radically different investment objectives. While one may focus on capital gains, another may specialize in income investing.

  • What securities does the fund invest in? A number of funds claim their main investment products are commodities when in reality only a small percentage of the fund is commodities-related.

  • Who manages the fund? You want to know as much as possible about the individuals who are going to be managing your hard-earned money. Most money managers in the United States have to be registered with the National Association of Securities Dealers (NASD). You can get information on the manager’s personal background by checking the FINRA Web site.

  • What kind of strategy does the fund use? Some funds follow low-risk, steady income strategies, while others have a more aggressive strategy that uses a lot of leverage. Identifying the fund’s strategy right away is critical.

  • What is the profile of the typical investor in this fund? The fund will cater to the profile of its investors, which can be anywhere from highly conservative to extremely aggressive.

  • What are the main risks of investing in this fund? Whenever you invest, you take on a certain degree of risk: interest rate risk, credit risk, risk of loss of principal, liquidity risk, hedging risk, and geopolitical risk.

  • What is the fund’s track record? Although past performance does not guarantee future results, it’s always important to examine the fund’s track record to get a sense of the kinds of returns the managers have achieved for their investors in the past.

  • What is the fund’s after-tax performance? Be sure to pay close attention to after-tax returns when looking at historical performance, because these are a more accurate measure of the fund’s performance — and how much money you get to keep after you pay Uncle Sam.

  • What are the fund’s fees and expenses? Fees and expenses are always going to cut into how much money you can get out of the fund. Look for funds that have lower expenses and fees.

  • What is the minimum capital an investor must commit? This can range anywhere from $500 to $10,000 or more. The minimum requirement may also vary according to the type of investor. Someone investing for an IRA may have to put up less money up front than someone investing through a brokerage account. Finally, many funds also require minimum incremental amounts after the initial investment amount.

  • Are there different classes of shares? Most mutual funds offer more than one class of shares to investors. The different classes are based on a number of factors, including sales charges, deferred sales charges, redemption fees, and investor availability.

  • What are the tax implications of investing in this fund? Talk to your accountant in order to determine the tax consequences of any investment you make.

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