Types of Commodity Mutual Funds
Commodity Mutual Funds can be categorised into the following categories:
1. Natural Resource Funds: These are those funds that are used to invest in companies and organisations that have access to the exploration of natural resources. The most popular among investors are gold, silver, oil, etc. Recently, investors have preferred renewable energy sources like wind energy due to recent technological advancements. Also, they often do not hold actual commodities or commodity futures, but they provide exposure to other commodity markets.
2. Basic/True Commodity Funds: These are those funds that predominantly invest in real physical assets. For example, metals are a naturally occurring resource. These funds are also referred to as basic since their pooled corpus directly purchases the commodities.
3. Future Funds: Commodity futures are a very popular option among investors, where the physical delivery of the commodity is possible only at a predetermined date. However, these are typically riskier on account of fluctuations in rates; there is a possibility of losing money if prices fall. Investors prefer this fund, as they are only interested in benefiting from price fluctuations rather than receiving actual physical delivery of commodities.
4. Index Funds: This is a fund that is marked against a standard market index, with the fund aiming to match or keep pace with the ongoing market trends. Commodity index funds are passive mutual funds in which assets are utilised to directly purchase commodities at market pricing based on benchmarks.
5. Combination Funds: A combination fund is a mix of the basic commodity fund and commodity futures. This type of fund combines commodity futures with the fundamental commodity fund. As part of their overall investment strategy, these funds invest in both basic commodities and commodity derivatives. Here, the volatility is controlled by traditional commodity investments; however, the risk is considerable with commodity futures.
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