Catch the commodity cycle through SIPs

TAXATION

Until recently, retail investors could participate in mutual funds through a systematic investment plan (SIP). But if they wanted to invest in commodities through this route, there was no choice. However, National Spot Exchange (NSE) has launched e-series, where retail investors can invest in several commodities through the SIP route.

At present, five commodities — gold, silver, copper, zinc and lead — are available to be invested through this route. The exchange plans to increase the number of commodities to 20 by March-end of financial year 2011-12, according to Anjani Sinha, managing director and CEO, NSE.

These commodities must be purchased in units, where a single unit may be equal to a gram (gold), 100 grams (silver) or a kilogram for the other three commodities. For trading, you must open a separate demat account with a broker registered with NSE. This account is different from the one used for investing in shares. The cost for opening the account is Rs 100-150 (it could be waived by some brokers). There is an annual cost of maintenance of Rs 300-600.

In addition, there will be transaction costs — a brokerage (0.20-0.25 per cent), service tax (12.36 per cent) on brokerage and securities transaction tax (0.125 per cent) — quite similar to trading in equities.

The tax liability will depend on the capital gains booked either in the short- or long-term. Short-term in commodities is less than three years and long-term is more than three years. Since there is no actual delivery or transfer of commodities, any gain or loss accrued will be considered speculative in nature.

So, if a retail investor were to sell in less than three years (short-term) for capital gains, it will be added to the income and taxed, according to the income slab. In case there is a short-term capital loss, the investor can set it off against short-term or long-term capital gains for four years. Long-term capital losses can however be set off only against long-term capital gains. In both cases, the loss can be carried forward for eight years from the date of the sale. Also, the set-off can be done in parts. When selling after three years, there will be a tax of 20 per cent with indexation benefits on the capital gains, if any. And, for those investing through the SIP route, the tax calculation will be on a first-in, first-out basis.

Kishor Narne, head-commodities research, Anand Rathi Financial Services, says retail investors entering commodities through this route should not worry about speculative gains or losses. Investors should be prepared to hold the commodity for a relatively long-term to benefit from a rise in prices. Investors through SIPs can hold the commodities in the demat form in their accounts.

Experts caution that only educated investors should get into the business of investing in commodities. It is simply because merely holding a commodity for a long tenure will not guarantee huge returns. The method of identifying the right commodity, and at the right time, are important.

“Commodity prices get impacted by international macroeconomic factors and governed by global demand-supply forces,” says Amar Singh, head-commodities research, Adity Birla Money. As news flow pertaining to these events is low and not as easily accessible by retail investors, exposure to such investments is fraught with risk. Ideally, invest 5-10 per cent of your portfolio in commodities and, preferably through the SIP route.