How to Invest in Commodity Mutual Funds

Commodity mutual funds can be useful for diversifying a portfolio. Commodity mutual funds can provide a hedge against inflation, expanding your investment exposure while reducing risk. While you could choose to invest in just one commodity market, you risk losing money if the market experiences negative movement. By investing in a commodity mutual fund, your investments can be spread across many markets, lessening your risk and improving your chances of profiting.

Difficulty:

Moderate

Instructions

Things You'll Need

• Internet access
• Financial advisor or investment broker
• Money to invest

Instructions

1. Learn about commodities. Basically, commodities are things that are grown or occur naturally, such as grains, crude oil, cotton, sugar, cattle and wheat.

2. Understand the purpose of commodity mutual funds. You may find these funds interesting if you are looking for long-term growth rather than fast movement.

3. Recognize the risks involved and realize that past performance does not guarantee future results. Many investment advisors suggest that commodity mutual funds make up just a small percentage of an investor's portfolio.

4. Use the Internet to research and compare commodity mutual funds. Morningstar and Lipper offer numerous online resources for researching and analyzing mutual funds, and links to these sites can be found in the Resources section below.

5. Request prospectuses of attractive commodity mutual funds and review them carefully. Pay close attention to fees and other charges to ensure that they won't reduce your investment too much.

6. Discuss your investment goals with a financial advisor or broker. Select the fund or funds that best match your goals and purchase shares through your broker or by contacting the fund directly.

Tips & Warnings

• As an alternative to commodity mutual funds, you may choose to build a mutual fund portfolio of mutual funds that simply invest in commodity-oriented businesses.

• Consider the relationship between fund trading and management fees. Essentially, more trading often translates into higher fees.

• Mutual fund prices are quoted online and in the newspaper as net asset values (NAVs). Mutual fund NAVs are calculated following the close of the stock exchanges.

• The Securities and Exchange Commission (SEC) makes the rules concerning the information that must be included in a prospectus, as well as when it must be updated. Mutual funds must update their prospectuses every year. A prospectus contains a wealth of information, including, but not limited to, details concerning the history, performance, objectives and investment strategies of the fund. Also included are details concerning expenses and charges.

Resources

• Visit the Morningstar, Inc. site by clicking here.
• Find further financial info at Lipper's Web site by following this link.