Commodity funds are those that basically make investment in commodities. This may include Gold, Oil, Live stock or some other. They also invest in commodity options and futures.
Covering the various kinds of products like Gold, Oil, Agricultural products and many others these prices are directly influenced with the performance of economy, push of demand and supply. Unstable commodity prices offer investors the leverage to help them generate extended revenues and thus amplifying their savings.
Conceptual view of the foreign exchange market known as forex.
Commodities, it seems like are the toast for investors Direct investing requires taking deliveries which are difficult or trading in futures that are often tough to understand and this has prompted investors to invest indirectly.
It is through the results of inability to deal directly that most of the investors to go for stock companies. In India, top performing mutual funds or any other funds can only invest in one commodity i.e. Gold. That’s why most commodity funds, excluding the gold exchange traded funds, invest in shares of some other commodity companies or buy funds that invest in such brands.
Pros and Cons
Since these commodity funds make their investment in stocks instead of direct commodities, the returns may not be in line with the certain underlying commodities. Basically the prices of such commodities are dependent on demand and supply, where as the share prices of these commodities solely depend on availability of commodities they are manufacturing, the fundamentals, the macro economic factors, and the overall market sentiments of equity.
The performance of such commodity companies are prone to many other factors driving the general equity market which may or may not always play out some favorable outcomes for investors. For example: in 2011, major commodities such as gold, thermal coal, copper, aluminium and iron ore are up 20-30% year-on-year but stocks of companies dealing in these commodities have been beaten down due to the global macroeconomic uncertainty! While going through news and nifty live chart we encounter numerous shares, mutual funds that might seem to be effective and promising but sometimes things are far different from expectations.
You have to identify which commodity is volatile in which phase of time and has the efficiency to yield profitable results