Commodity Funds: Risks & Rewards - A Comprehensive Guide

Investing in commodity funds has become a popular alternative to the traditional mutual fund. This type of fund offers you with a number of benefits as an investor. Here are a few of the risks and benefits associated with investing in commodity funds. 

Benefits

Investing in a commodity fund presents a very convenient scenario for traditional investors. For many years commodities were an area that was difficult to access for the standard investor. In order to get involved in the commodity market, one had to purchase confusing futures contracts or house the physical asset. This eliminated many that did not want to work with a futures broker or warehouse a valuable asset in their home. With the commodity fund, you can easily get involved in the commodities market with nothing more than a standard brokerage account. This has opened the door to many investors that would otherwise not be able to get involved.

Taking advantage of supply and demand is another benefit of investing in commodity funds. Since commodities represent a limited asset, when the demand for them is high, this can represent a significant boon for investors. For example, if you were to invest in building materials, when demand for these materials goes up because of a rise in construction, you can make a significant return on your investment. This type of fund allows you to take advantage of limited resources.

The commodity fund also present investors with a way to hedge their portfolios against inflation. When you invest in stocks and bonds or anything else that is tied to money, you are always a risk of losing part of your return to inflation. When you invest in commodities, this is not an issue. The price of gold or silver will always move with inflation and will always be worth something.

This type of fund also offers investors a way to diversify away from the traditional market. It provides an asset that is not correlated to the stock market in any way.

Risks

Investing in commodities can offer investors a good return on their investment. However, it is also a very volatile type of investment. It can lead to a significant loss in your portfolio under the wrong circumstances. While the values of commodities tends to always go up, if you time the investment wrong, it could cost you substantially. On more than one occasion, the prices of certain commodities have went from record highs to record lows in a matter of a few days.

This type of investment presents you with no control over what is actually invested in. While you can choose which funds you purchase, once you give them your money, they are free to do with it as they please. Therefore, if you wish to purchase a certain commodity, the fund might have different objectives. Sometimes they have limits on how much of a commodity can be in the fund. Therefore, it might not always coincide with your personal investment strategy.