Investors are increasingly excited about the opportunity presented by the commodity sector. After the turmoil of the recent years, with the economies of the world crashing in a noisy synchronicity during the global financial crisis, the commodity sector has shown its resilience.

Despite big initial knock downs, the bounce back of value has been equally dramatic. This is symptomatic of a world whose hunger for commodities shows no signs of abating. That long term potential continues to attract investors, wary of the performance of the stock market. Also, many people are looking to diversify their investments, or perhaps to hedge price inflation. Could Commodity Mutual Funds offer an efficient way into the commodity market, and address these needs?

Mutuality can make profits less risky

Commodity Mutual Funds are a flavor of that staple of the investment world, the mutual fund, that have operated in the US for many years. Mutual funds bring together the pooled assets of investors with the talents and skills of a portfolio manager, whose role is to trade those funds on behalf of the investor. Obviously, maximizing profits is the name of the game for the fund, but the mutual fund must invest in assets that are clearly defined its prospectus, according to a planned investment strategy.

Many investors are aware of, and have participated in, mutual funds, especially as part of their IRAs. As the Net Asset Value of the fund’s investments appreciates, so the IRAs value increases; mutual funds offer less risk than investing in stocks with retirement monies one company at a time. This is because most mutual funds are diversified - they place money across a range of different types of assets, and so are not tied to extreme moves in just one. An investment that is not diversified has a large risk of losing much of its capital value. Mutual funds are also subject to their own accounting, tax and regulatory rules, making them a relatively well regulated segment of the investment industry.

Can you hedge inflation?

Commodity mutual funds are simply funds that tie their investments to the commodity sector, but they offer some interesting twists for the investor. They can offer an 'inflation hedge' by weighting their commodity investments in proportion to volumes of each commodity used as primary inputs to the economy. This can be useful where there are concerns that inflation may eat into returns on other investments.

Commodity funds can alternatively seek to take advantage of particular sub-sectors, such as precious metals, energy or softs (agricultural products), that may offer good returns. So if you are looking for plenty of upside potential, but are wary of investing directly in commodities, or the futures market, then it may be that Commodity Mutual Funds are for you.