When Should You Invest in a Commodity Fund?

Investing in a commodity fund has become a very common investment tool with many investors. While the commodity market used to be inaccessible to the average investor, commodity funds have made them available to the masses. Here are a few things to consider about when to invest in a commodity fund.

Commodity Funds

This type of investment is basically a mutual fund that invests in certain commodities. The mutual fund may invest directly in the commodities through futures contracts or by purchasing the physical asset. They could also invest indirectly, in the commodities, through commodity stocks. These mutual funds will try and take a diversified approach to investing in commodities by purchasing thousands of shares of different assets. This makes investing in a commodity fund slightly safer than investing directly in the commodity yourself.

Diversification

One of the best times to invest in a commodity fund is when you want to diversify your portfolio. Many investors rely simply on the stock market for their investment returns. Over the long-term, this can work because the stock market tends to increase in value, over an extended period of time. However, on the shorter-term, the stock market can crash and go through down periods. In addition, individual companies within the stock market can go bankrupt. If you own stock in these companies, it can devastate your investment portfolio and your retirement.

With this in mind, investing in a commodity fund could be a good idea for you because it will allow you to pull away from the stock market and not rely on stocks for returns. By implementing this as part of your portfolio, even if the stock market crashes, you will still have some of your investment dollars intact.

Commodity Speculation

A commodity fund is also important for investors that want to take advantage of price speculation on a particular commodity. For example, due to knowledge that you have acquired, you might believe that the price of a certain commodity will go up in the next year. At that point, you could invest in a commodity fund deals with this commodity and then benefit from the price increases in the commodity itself. When investing in a commodity fund, you should realize that the gains will be more gradual. However, this also protects you as your losses will not be so severe.

When you know that a particular resource is limited, it might be best to invest in a commodity fund based on the resource. For example, you know that oil is a limited resource. Therefore, the price of oil will undoubtedly keep increasing over the long-term. Until a viable alternative to oil is discovered, an investor could still profit from price increase. Be sure to examine long term effects before you leave the money in the market for extended periods of time. It is always a good practice to examine your investments periodically and see if they are still working for you.

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