Does Inclusion of Commodity Funds in My Portfolio Hedge The Risk?
Commodity funds are direct proof of holdings that may be backed up by physical products. In other words, if you are holding gold mutual funds backed up by stored gold bullion, you have a commodity fund. Holding commodity papers are much more convenient that storing physical deliveries of corn, hogs, oil or any other disposable commodity and trying to trade those commodities across the board. Commodities can also be traded in the spot market for immediate delivery. Energy is an example of a commodity that is traded on the market and then immediately delivered into the consumption grid. Oil is traded, placed into manufacture and sent on to consumption. Commodities can be highly rewarding and are often used as a hedge against inflation given that the prices of commodities tend to rise with inflation. Conversely stock prices fall during inflationary periods which in turn cause a loss in an investment portfolio. This makes the commodity market particularly attractive to savvy investors. There are several types of commodity funds to be considered and ways to trade these commodities.
– Natural resource funds or funds that operate in energy, mining, oil drill and agricultural are funds held by proxy rather than physical goods.
– Combination funds are the set commodity and commodity futures. Precious metals mutual funds have fundamental holdings that include bullion and futures and can be traded by EFTs.
– Product funds in a portfolio offer a variety of investment strategies or active and passive management. Active folders buy and sell in an effort to outperform benchmark indexes. Passive portfolios try to replicate a benchmark index and match its performance. You can use passive strategies to index funds or exchange traded funds (EFTs).
– Investing in commodity funds can offer diversification for a portfolio and are not traditional stock, or mutual funds. Commodities have low equity markets and generally do not fluctuate with market movement. Diversification in an investment portfolio can hedge the risk or provide stability.
– When the demand of commodities rise, prices will also rise and these result in a profit for investors.
– Commodity funds are also a hedge against inflation. There is downside protection, but upside potential when investing in different types of commodities including energy mutual funds of oil, gas, petroleum and electricity.
– Although commodity funds carry low risk, commodity markets can be subject to short-term prices swings or stagnant pricing markets. Examples include the prices of grain that are dependent on the weather and market conditions and precious metals that historically fluctuate from extreme highs to record lows.
When seeking to add commodities to your investment package, be aware that the market is highly complex and you do need to read and understand the fund’s prospectus to understand what you are buying. Know how much of a fund’s assets are linked to a market sector and plan accordingly. Use mutual fund companies to tract the volatility of a particular commodity and possibly only hold commodities to a small percentage of your total investment package.