Mad Rich

Commodity mutual funds are those where investment is done in certain designated real assets or the derivatives like futures contracts. The commodities or the derivatives are traded for having maximum profit. Sometimes financial assets are out of favor and real assets are in favor. Thus, mutual funds have to deal with this situation.

Bench mark indices

Commodities market is for trading in real assets unlike virtual assets in conventional markets. There are two indices marking commodities market. One is called GSCI (Goldman Sachs Commodity Index) and the other is DJCI (Dow Jones Commodity Index). GSCI has 22 different commodities listed on the basis of the contracted future prices. These commodities range from oil to cooking fuel oil. 55% of the commodities are made up of Energy futures and another 25% by agriculture commodities. The balance is divided among bond markets. This index is broad based and diversified. It gives weightage to long term and un-leveraged commodities. This weightage is computed on the basis of the commodity’s currency in the economy. The quantity of the commodity and their presence in the index are calculated on the basis of the five year average production. The DJCI is a pretty liquid index that has a broad outlook and worldwide importance of commodities. No commodity can be represented more than 33%.

Operation

The operation of commodity funds is done by investment in future contracts to anywhere between one third and one half of the asset. The contracts are made for a future date. The price is decided by obligating the buyers and sellers. These futures or contracts are traded on exchanges. The values change based on speculation and hedging. The future notes may be delivery based. Others may be cash settled after expiry of the contract. The maximum out of the speculated value and the contract value are selected. The commodities mutual funds invest the balance money with them in short term government securities to have some sort of stability. The returns on these would consider returns from commodities investments after paying for expenses. A small quantity of money can be set aside for speculative trading in commodities like silver, hogs etc. In some funds, the earning made on government securities are used to take care of effects of insulation. These are called as inflation free funds or inflation insulated.

Current investment

Commodities mutual funds are trying to bring the futures and options markets to the reach of the retail investors. Commodities markets are in need of investments to the order of $50,000 to $100,000 in a single attempt. Apart from the 20% cut in the profit, there are 3% to 4% asset fees. The commodities mutual funds have an absence of the history of track record. It is still doubted whether one can profit by investing in these funds. If one is optimistic, one can invest in them for short periods. As a reaction to inflation, there are market forces and fluctuation in the indices. The weightage to speculative investment is limited. However, the weightage in high priced commodities like silver, copper etc must not be forgotten.