Commodities in the RCIX have been selected and weighted based on three parameters - trading volume in rupee terms, open interest (OI) on the basis of number of contracts, and the fundamental strength of the commodity in India. For inclusion in the RCIX, a commodity has to have an aggregate weightage of 1 per cent based on the above three parameters. Index weightages are changed every month so as to reflect changing conditions in the market. Base RCIX starts from April 1, 2004.
As for September, gold has the highest weightage in the index at 23.37 per cent, followed by wheat at 20.11 per cent, silver at 18.63 per cent, refined soya oil at 10.39 per cent and guar at 11.40 per cent. RM seed and chana are next on the list at 7.64 per cent and 7.04 per cent respectively.
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| According to a study done by Sushil Global Commodities (SGC), a member of the Multi Commodity Exchange (MCX), Mumbai, and the National Commodity & Derivatives Exchange (NCDEX), the risk-adjusted returns offered by commodities as an asset class in conjunction with equities are much better than a purely equity-driven portfolio. |
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For example, if an investor bought only silver and bonds over the last six years (1997-2003), his absolute returns would have been 24 per cent; the risk involved is only 6.58 per cent. This beats returns on all other bond, equity and gold combinations.
The diversification edge
(Risk-adjusted returns for the period 1997-2003, in %) | | Portfolio structure | Absolute cumulative
returns | Risk of
portfolio | Adjusted
returns | | 100% stocks | 73.70 | 24.43 | 3.02 | | 50% stocks + 50% gold | 47.80 | 14.37 | 3.33 | | 50% stocks + 50% silver | 48.30 | 13.29 | 3.63 | | 100% gold | 21.80 | 10.89 | 2.00 | | 100% silver | 22.90 | 13.14 | 1.74 | | 100% bonds | 25.20 | 7.92 | 3.18 | | 50% bonds + 50% gold | 23.50 | 8.79 | 2.67 | | 50% bonds + 50% silver | 24.00 | 6.58 | 3.65 | | Source: NCDEX |
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| In comparison, cumulative gains by buying only equity would have been 74 per cent, but the risk (standard deviation) would have been 25 per cent - more than four times the risk faced in the former case. |
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| On an annual basis, while risk-adjusted returns from a 100 per cent stock portfolio and a 100 per cent bond would have been around 3.02 per cent and 3.18 per cent respectively, a 50 per cent stock and 50 per cent silver portfolio would have given you returns at 3.65 per cent, while a 50:50 stock plus gold portfolio would have generated 3.33 per cent. |
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| While absolute returns from stocks and bonds are definitely higher than pure commodities, it is always based on higher risk, while commodities carry a lower downside risk than the other classes. Commodity analysts point out that this is because pricing in commodity futures is less volatile compared with equity and bonds. |
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| To put things into perspective, while the average annual volatility is around 25-30 per cent in benchmark equity indices like the Sensex or the Nifty, it is 12-18 per cent in a commodity like gold, 15-25 per cent in silver and a much lower 10-12 per cent in cotton. The volatility in government securities is even lower at 5-10 per cent. |
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| Apart from lower volatility, the underlying factors that influence commodity and other investment markets also differ considerably. As different from paper investments like equities and bonds, commodities - such as bullion, oil, metals, energy and agricultural products - are assets that have tangible properties. |
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| "Stocks and commodities are driven by different factors. So investors value them differently," notes Sanjiv Shah, executive director of Benchmark Mutual Fund. |
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| Unlike stocks, commodity prices are dependent on the demand-supply equation of that particular commodity, global weather patterns, government policy related to subsidies and taxation and international trading norms, as guided by the World Trade Organisation (WTO). |
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| How to start trading in commodities
Several established broking houses like Refco Sify Securities, Sharekhan, ICICI Direct and SGC have memberships with leading commodity exchanges like the NCDEX and the MCX. The investor needs to have a bank account and a separate commodity demat account from the National Securities Depository (NSDL) to trade at the NCDEX. Investors can either give delivery or settle in cash, as both the exchanges have cash and delivery mechanisms. If you want your contract to be cash-settled, you have to indicate at the time of placing the order that you don't intend to deliver the item. If you plan to take or make delivery, you need to have the requisite warehouse receipts. The warehouse will give instructions to NSDL which dematerialises the warehouse receipts and credits the seller's account. Delivery on the NCDEX will be by way of electronic transfer of dematerialised receipts from the seller to the buyer. The buyer can then rematerialise the receipts and take his goods from the warehouse. |
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| This asset class is a good diversification option because it has a high correlation with changes in inflation and a low correlation with returns on stock and bonds. |
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According to a study by SGC, the correlation co-efficient of gold to stocks is 0.206, while that of gold to bonds is higher at 0.746. In the case of silver, it is even more pronounced at -0.099 to stocks and 0.146 to bonds. Thus commodities are a good bet to hedge against inflation besides being a means to diversify one
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