Commodity Mutual Fund

Maximize Your Profits with Commodity Mutual Funds

Commodities mutual funds are those investing in certain designated real assets or their derivatives like futures contracts. The commodities or the derivatives are traded for maximizing profits. This article informs you on:

-Know in detail about commodity mutual funds
-Which are the two indices marking commodities market?
-out the principle behind commodity mutual funds

There are times when financial assets are out of favor and real assets are in favor, Mutual funds need to address that. says Don Phillips, president of Morningstar Inc.

Commodities mutual funds are those investing in certain designated real assets (as listed in the following paragraph) or their derivatives like futures contracts (instruments that facilitate investment in commodities). The commodities or the derivatives are traded for maximizing profits. All said and done there are no commodity mutual funds in real terms and all those trading in commodities are hedge funds (hedge funds are for big time investors who can pool in excess of $1 million for the purpose of trading in commodities).

In a way commodity mutual funds are scaled down versions of hedge funds that provide a chance to retail investors to take a look at commodities market who otherwise were not able to.
Bench Mark Indices for Commodities Mutual Funds
Commodities' market facilitates trades in real assets unlike virtual assets in conventional markets. For example we have two indices marking commodities market. One is GSCI, stands for Goldman Sachs Commodity Index and DJCI, which stands for Dow Jones Commodity Index.

GSCI has 22 different commodities right from oil to cooking-fuel oil listed on the basis of their contracted future prices (technically called as futures). About 55% of this is made up by Energy futures and another 25% by agriculture commodities. The balance of them is spread amongst bond markets. This broad based, diversified index gives weightage to long term and un-leveraged commodities. The weightage itself is calculated on the basis of the commodity's currency (flow through) in the economy. The quantity and their presence in the index are calculated based on their five year average production.

Where as the DJCI is a pretty liquid index with broader outlook and worldwide importance of commodities. None of the commodity can have a representation of more than 33%.

How Do Commodities Mutual Funds Operate?

Commodity mutual funds operate by investing in what are known as future contracts (an industry jargon for instruments of contract for commodities & prices) to anywhere between one third and one half of their asset. The contracts are made for a future date and price obligating the buyers and sellers. These futures (contracts) are traded on exchanges and values vary based on speculation and hedging (reducing risk). Some future notes are delivery based (delivered to the buyer) and some others are cash settled upon expiry of the contract at the higher of the speculated value and the contract value.

The commodities mutual funds, in order that some kind of stability is attained will invest the balance money with them in short term government securities. The returns on these will compliment returns from commodities investments apart from paying for expenses. A small amount may be set aside for speculative trading in commodities like silver, hogs etc. Some funds take care of effects of inflation by the earning they make on government securities. These are known as inflation insulated or inflation free funds.