Take feeder fund route for agri exposure

Mumbai-based R P Kedia has been investing in gold from the time he started earning 35 years ago. He has earned handsome returns. Now, experts’ bullish views on agricultural commodities has got this 62-year-old inquisitive. He wants to know how to take exposure in agricultural commodities.

According to data from the National Commodity & Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX), mentha oil has given 120 per cent and potato 60 per cent returns in the past year. Chana, mustard seed and pepper have given close to 50 per cent returns. Over three years, mustard seed has given 600 per cent, mentha oil 300 per cent and pepper 200 per cent returns. Even in the past six months, potato has returned 150 per cent, mentha oil 60 per cent and soyabean 50 per cent returns. On the other hand, chilli and turmeric have lost 50-60 per cent in the past one to three years.

Typically, farmers sow more of the commodities that have given high returns. So, sowing of commodities that have seen very good returns should go up in the next season. On the flip side, both sowing and production may increase, resulting in a fall in prices.

According to Viral Shah, senior vice-president at Geojit Commtrade, the agricultural commodities' market is sizable but largely sees trader and corporate participation.

You can put money in agricultural commodities via the spot market, futures market or the National Spot Exchange's e-contracts. Spot market means going through the mandi, for which you need to get registration and pay value-added tax (VAT) on the transactions.

In the futures market, you need to open a trading account with a broker, complete the know-your-customer (KYC) formalities, pay a margin and start trading on NCDEX or MCX. “Typically, the contract size varies between Rs 2 lakh and Rs 4 lakh, and you pay a margin of five to eight per cent of that,” says Shah. Margin requirement can sometimes be very high, between 25 and 40 per cent. Guar was charging a margin of 40 per cent before the trading stopped. Mustard and chana levy 25-30 per cent.

“These routes are not meant for retail investors. They don’t understand the market and being speculative, the market is very risky. Retail investors don’t have the kind of skills and information required for this market,” explains Naveen Mathur, associate director, commodities & currencies, at Angel Broking.

Taxation norms for gains in the futures market are also steep. The law says any transaction for commodities other than an actual delivery is treated as speculation. As a result, speculative gains are taxed as business income at 30 per cent. And, a speculative loss can be set off only against a speculative gain.

The price volatility in agricultural commodities is not easy to absorb. You need to know factors like the demand-supply equation, government policies, sowing and harvest seasons. Therefore, trading in agricultural commodities requires a lot of knowledge and understanding of local situations. This route is certainly not meant for the likes of Kedia, warn experts. Retirees should stick to allocation in gold, up to 10 per cent of the portfolio.

Financial experts favour international feeder funds that invest in agricultural companies abroad. Reason: There is an expert's view driving your money at a much lower cost. The overall asset management charges are capped at 2.25 per cent. The only disadvantage is that these are treated as debt funds, where the short-term capital gains tax (less than 12 months) is 30 per cent. The long-term one (more than 12 months) is 10 per cent without indexation or 20 per cent post it. Currently, there are three funds investing in agriculture and related companies - Birla Sun Life Commodity Equities - Global Agri Ret, DWS Global Agribusiness Offshore Reg and the recently launched DSPBR World Agriculture.