A commodity mutual fund is an investment vehicle that combines the inflation hedging advantages of commodity investing with the ease and simplicity of investing in mutual funds.
When one own shares in a mutual fund, one is buying a share of a diversified portfolio that a professional money manager has put together to meet certain criteria and investment objectives. It allows an investor the ability to buy “shares” in many companies at once, and achieve a more diversified selection than he or she would be able to put together on their own. The entry point for investing is low with mutual funds – as low as $500 to $1,000 – for some. For that level of investment, it would be difficult, even impossible, to get as broad a list of company shares to own.
Investing in commodities is often said to be a reliable inflation hedge. Commodities are goods such as crops and agricultural products or factors of production such as coal, oil or minerals. Commodities are commonly sold on the spot market for immediate delivery or by futures contracts for speculation, hedging or trading purposes.
The advantage of investing in commodity mutual funds for investors is twofold. Commodities are a hedge against inflation because when inflation goes up, so does the price of commodities. Secondly, investing in a mutual fund spreads the risk over a larger basket of commodities thus reducing exposure to any one category of commodity. Commodity mutual funds are a hybrid-type of investment borne from the need to provide access to this asset class to investors of all wealth levels.
Spectrem Research has identified the investment preferences of affluent investors with regards to investing in mutual funds and commodities. Both asset classes show increased participation as wealth levels increase.