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| Limit exposure to commodities |
| Tania Kishore Jaleel / Mumbai Sep 15, 2011, 00:38 IST |
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Hold on, caution experts, who explain why raw investors wanting an alternative to equities should rather stick to bullion.
A range-bound and uncertain equity market has made a lot of investors shift to commodities. Brokers are flooded with requests to shift equity accounts to commodities and open new accounts. Besides gold and silver, the market for crude oil has also witnessed an increased interest.
This shift is reflecting in the overall turnover. In August, the average daily turnover in commodity exchanges shot up to Rs 76,268 crore. That is a 64 per cent jump over the average daily turnover of Rs 46,328 crore in January this year. In comparison, daily average turnover in cash equities fell 18 per cent to Rs 13,708 crore from Rs 16,846 crore clocked in January.
| WHEN INVESTING IN COMMODITIES |
- Square off positions when the contract expires
- It is important to choose the commodity that you understand
- Factors such as currency, weather and so on impact the price of commodities
- Bullion can be used for investment purposes; agri-commodities are meant mainly for trading
- Commodity prices are extremely volatile
- Invest 10-20 per cent of your portfolio in alternative asset classes that include commodities
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However, commodity trading is not everyone’s cup of tea. Retail investors, for whom trading in equities’ futures and options is complex, will find commodities even more complicated.
Losing money while you sleep:
A little known fact newbies in the commodities market need to keep in mind is that there is every chance of losing money even when one is asleep. Unlike equity trading that ends at 3.40 pm each day, commodity trading goes on till 11.30 pm. A late night development in global markets could impact investments.
Commodities are only traded in the futures segment: Derivatives trading is risky, says Naveen Mathur, associate director-commodities at Angel Broking. The risk only increases with commodities, since you cannot take delivery. His advice: "Don't try carrying forward the position when the contract expires. Instead, make sure to square off your positions."
Choosing the commodity: Commodity exchanges such as MCX, NCDEX and so on offer a huge range of commodities that one could invest in. However, not all of these may be the best for you. Especially if you're planning to invest in agri-commodities like guar gum, chilli, turmeric, potatoes, cashew nuts, jeera and so on. Vishal Kapoor, director and head of wealth management at Standard Chartered Bank, says only those already in the business should get into these. The logic: "It is very important to understand what is underlying the commodity you are investing in. Some commodities are more volatile than others. Precious metals are easier to understand than most agri-commodities."
Alex Mathew, head of research at Geojit BNP Paribas Financial Services, says unlike equities where the data is available through a company's balance sheet, the information regarding commodities is harder to get. Here, the price of a commodity is determined by various reasons like currency, weather and so on, none of which are in your control.
Deven Choksey, managing director at KR Choksey Securities, says bullion is probably the only commodity that can be used for investment purposes. "Other than bullion, agri-commodities and so on cannot be used for investments; one can only trade in these."
Another issue with agri-commodities is that one cannot store these in physical form, unlike gold or silver.
Sticking to the tried and tested: According to Kapoor, keep aside not more than 15-20 per cent for alternative asset classes to fixed income, cash and the equity segment.
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