How to Invest in Commodity Mutual Funds - dummies

How to Invest in Commodity Mutual Funds

By Amine Bouchentouf

A common way to invest in commodities is through a mutual fund. It may be the simplest way for you to get involved in the commodities markets because you’re relying on a trained professional to do the investing on your behalf.

A mutual fund is a fund managed by an investment professional for the benefit of the fund investors. Mutual funds, by definition, can follow only a specific set of trading techniques. Mutual funds don’t engage in sophisticated trading techniques such as arbitrage trades, special situations, long–short strategies, or distressed asset investing.

These strategies are conducted primarily by hedge funds, which are similar to mutual funds except that they can engage in these sophisticated investment strategies. Most mutual funds follow long-only strategies, which is an investment policy based on the buy-and-hold principle.

Many different types of mutual funds have nothing to do with commodities. You can invest in stock funds, bond funds, currency funds, and even country-specific funds. But a number of mutual funds specialize in investing in only commodities or commodity-related products.

Plain vanilla funds are your run-of-the-mill funds. If you’ve ever invested in a mutual fund, you should have no problem investing in these straightforward funds. How do you get started? You write your check, purchase shares of the mutual funds either through your broker or directly from the fund providers, and voilà! Of course, you should ask a number of questions before you write that check.

Plain vanilla funds are actively administered by a fund manager whose responsibility is to allocate capital across various subasset classes, to maximize the fund’s returns. Generally, these mutual funds invest in commodity-linked derivative instruments such as futures contracts and options on futures traded on the major commodity exchanges in New York, Chicago, and elsewhere.

Other mutual funds may also invest in companies that process these raw materials, such as energy companies and mining companies.