In the last 10 years, I have followed the principle of asset allocation of 60:30:10 for my portfolio. Now, that most of my responsibilities are over, I want to take some risk with my money. I recently read about investing in arbitrage opportunity in commodities and managed commodity futures. What is this product? How does it work and with how much risk? I am 57.
First of all, from a strict financial planning perspective, at your age, you should be reducing risk in your investments, not increasing them. Having said that, every person’s situation is unique and your case may also be different. I don’t know exactly which product you are referring to, but in general terms, one could trade in commodity futures. However, this is a specialised field and is not meant for an average investor, since a lot of study has to go into the seasonal and other factors influencing commodity prices and their expected movements. Trading in commodity futures on a margin could be a high profit-loss game and can be risky for someone who does not understand it properly. Therefore, one should venture into this field only after gaining adequate insight and being aware of its risks and rewards. In terms of arbitrage opportunities, there could be some available from time to time in various commodities. It generally entails buying a commodity in spot and selling futures. For example, you could buy gold in delivery and short the same quantity in gold futures against it for arbitrage.
I hold 50 stocks of Reliance Communication, 150 of HDFC and 50 of Kingfisher Airlines. While Kingfisher is facing debt problems, there has also been a report from brokerage, Veritas, saying the company might not last long. Similar reports were seen about Reliance Communication and HDFC also. I have not sold these stocks till now, but would you advise doing so? I have held these for three, eight and one years, respectively.
While I would not like to comment on individual stocks, the basic question raised by you is what you should do with stocks that you are holding, against which there have been negative reports issued by certain brokerages/research houses. First, you should do your own research before investing in stocks directly, and not blindly follow other research reports. While you should take notice of individual reports whether on the positive or negative side, one should take this opportunity to re-evaluate his own research on investments. You should not get swayed by them or panic, if their view is contrary to yours. If the company’s fundamentals are still sound, its business model robust, management is of high quality and business outlook positive, then why should you get affected by an adverse report? On the other hand, if you see that the company is actually faltering and facing problems that don’t seem to be getting solved anytime soon, then you should take a call whether or not to stay invested in that company.
The writer is CEO, Dalmia Securities