Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate category of funds that specialize in investing in derivative instruments, and these funds provide an excellent investment tool for investors who wish to diversify their portfolios with options and futures for various companies' stocks and commodities.

Options and Futures Mutual Funds

Mutual funds that specialize in generating returns from changes in commodities prices typically hold commodity futures and stocks of companies that extract and sell various commodities, such as oil, gold, gas, silver and other precious metals. Futures can be a substantial part of a mutual fund's holdings if a fund wants to pursue aggressive speculation and trading strategies that maximize the total return from the commodities market. Investing in commodities is very risky, and mutual funds typically utilize sophisticated investment techniques and hire highly competent management. This may result in a very high expense ratio charged by a commodities mutual fund.

For instance, the Rydex Basic Commodities Fund Class H (NASDAQ: RYMBX) invests in various exchange-traded products, including commodity-linked derivative instruments such as commodity options and futures. The fund charges a high gross expense ratio of 1.77% as of May 2018.

Some mutual funds invest in stocks but also hold options with the purpose of minimizing the downside risk and volatility of their portfolios. For instance, the Gateway Fund Class A Shares (NASDAQ: GATEX) invests in large-cap equities included in the S&P 500 Index. However, the fund sells call options against its portfolio and uses proceeds to purchase put options, which allows GATEX to hedge its entire portfolio against volatility and sudden large drops in prices. (For more, see Put Option Basics.)