Commodities get a lot of attention from the media. The price of oil, gold, corn, soy and hogs are in the national news nearly every day. While investing in the commodities markets is a fairly sophisticated endeavor, commodity mutual funds provide an opportunity for almost any investor to get a piece of the action.

A Variety of Fund Types

The generic label commodity fund actually captures several distinct types of investments. These include:

Commodity Funds

These funds are true commodity funds in that they have direct holdings in commodities. For example, a gold fund that holds gold bullion would be a true commodity fund.

Commodity Funds That Hold Futures

Holding commodity-linked derivative instruments is a much more common mutual fund strategy for investing in the commodities markets. Most investors have no desire to take delivery of hogs, corn, oil or any other commodity, they simply want to profit from price changes. Purchasing futures contracts is one way to achieve this objective. (To learn more about futures, see Futures Fundamentals .)

Natural Resource Funds

Funds that invest in companies that are engaged in businesses that operate in commodity-related fields, such as energy, mining, oil drilling and agricultural businesses, are often referred to as natural resource funds. While they often hold neither actual commodities nor commodity futures, they provide exposure to the commodities markets by proxy.

A Variety of Investment Strategies

In addition to a variety of formats, commodity funds also offer a variety of investment strategies, including active management and passive management. Active portfolios buy and sell in an effort to outperform a benchmark index. Passive portfolios seek to replicate a benchmark index and match its performance. Passive strategies can be implemented using index funds or exchange-traded funds (ETFs). (For more information on ETFs, see ETFs Provide Easy Access To Energy Commodities .)

Pros and Cons of Investing in Commodity Funds

Commodities also offer upside potential. The raw materials used in construction, agriculture and many other industries are subject to the laws of supply and demand. When demand rises, prices generally follow, resulting in a profit for investors.

Finally. commodities offer a hedge against inflation. (Commodities: The Portfolio Hedge explains how these diverse asset classes provide both downside protection and upside potential.)

Another item of note is the composition of various mutual funds and the benchmark indexes that they track. In many commodities indexes, energy is often the heavyweight, taking up more than half of the index. When a mutual fund seeks to directly replicate the index, more than half of the fund’s assets will be in energy. Some funds place limits on the percent of the portfolio invested in a single commodity to avoid an over-concentration in a single investment. (For more information on investing in commodities, see How To Invest In Commodities .)