Commodity Funds – What are Commodity Funds & How Do They Work

The exchange of goods and services for monetary units has long been a practice of trade and commerce. The value of the commodities, be it goods or services has always been determined by the amount of money it is transacted for. These commodities have played a significant role in the continuous running of the trade and commerce cycle, thus generating finances and value for its participants. It is essential to understand what these commodities are and how do they function in helping to keep the trade cycle running, and most importantly, how do these commodities generate finances for the participants.

What are Commodity Funds?

A commodity is any goods that are traded in exchange for other products that may hold similar value for exchange. Across the world, there are various commodities traded on a day-to-day basis that are valued highly for their commercial value and consumer demand ranging from petroleum products, gold, precious metals and stones, coffee and food-grains. These commodities traded in the domestic and international markets offer investors a chance to make investments in such commodities. The commodities traded are subject to demand and the market prices that govern the trade of these commodities.  

Commodity Funds: How do they work?

A commodity fund is a fund that is invested in the trade of a particular commodity, thereby allowing investors an opportunity to earn returns based on the performance of these commodities in the market. These funds specialise invest in a specific product. Any fluctuation in the price of these commodities will have a direct bearing on the returns earned on transacting. Investing in commodity mutual fund has its risks and advantages. Early investors need to have a thorough understanding of the functioning of the commodities markets and the risks and benefits of investing in commodity funds.  

Types of Commodity Funds

There are a wide variety of commodities that are actively traded worldwide daily. They are, therefore, categorised accordingly for trade and exchange and investment. Following are the broadly categorised commodity funds.

• Basic True Commodity Funds: These funds invest in commodities like metals, which are mostly physical assets.
• They are funds that are deemed as risky as they are subject to fluctuations in the market rates. Hence, they are prone to incurring huge losses on account of the steep fall in prices. Nevertheless, they happen to be quite popular among investors. The date for physical delivery of the commodity is predetermined
• Natural Resources Funds: These funds primarily invest in companies/organisations that deal with natural resources or natural commodities such as minerals, petroleum, oil, gold, silver, and so on.
• This fund involves a mix of commodity futures and essential commodity funds.
• Index Funds function with a standard market rate as their benchmark, and work to match the same or keep up with the changing market trends.

Why should you Investment in Commodity Funds?

The commodity funds are immensely popular among the investors, experienced or new alike. It is no wonder that it is owing to its favourable characteristics. These funds attract huge investments. They offer a wide range of benefits and advantages to their investors. However, one must be aware of the risks that come along with it.

Diversification of portfolio hugely reduces the risk of going down with a single failed investment, thereby diversifying the investment to various multiple stocks.

Protection Against Volatility: Commodities like silver and gold are not prone to market trends as in the case of other commodities. They are of immense value and provide good returns even when the market is down.

Strategic Advantage: Expert management helps in scoring the strategic advantage that comes from market experts having first-hand knowledge of the markets and commodities

Protection Against Inflation: Most of these funds give returns which are at par with the global market alterations, therefore acting as a hedge against inflation.

Flexibility in investments: The investors always have the option to meet their short-term or long-term investment goals through commodity funds.

Multiple Options:With a vast number of options to choose for investment, commodity funds surely help investors meet their investment criteria.

Risk: The risk associated with commodity funds can range from geopolitical to market performance depending on the commodities and how they fare in the global market. Investing in commodity funds requires a thorough understanding of the commodities and the market as it is quite complicated and risky. The investors must equip themselves with the functioning of the commodity markets. These funds are highly subject to market fluctuations, and hence there are no concrete parameters for fixed or guaranteed returns. The investors must be careful of the risks associated with the investment in such commodity funds.

For novice investors, it is recommended you seek expert advice before making any investment decisions. Visit ClearTax for further tips and guidance on investing. The realistic alignment of one’s investment objectives with the stark reality of the commodity funds should not surpass expectations. It requires a carefully decided investment of time and finances. The investors must be willing to diversify their portfolios, thereby minimising the risk and improving chances of better returns even when some commodities may perform negatively in the market.