Commodities spice up your portfolio

INVESTING

Investments in India have traditionally meant property, gold and bank deposits with most other investment avenues getting a mere look-in. But times are changing, if investment advisors are to be believed.

For starters, the equity market is attracting a lot of money and as investible amounts available with people increases, other asset classes are also being explored.

Commodities are now being seen as a separate asset class with huge growth opportunities, according to wealth managers.

Investment advisors say that commodities offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. If one is looking to diversify their portfolio beyond shares, bonds and real estate, commodities offers one of the best options, analysts add.

Why invest in commodities? For one, it can be a good low risk portfolio diversifier, acting as a counterweight to stocks, bonds, real estate in your portfolio as it relatively less volatile compared with say equities. Also, investors can take advantage by leveraging their investments, thus multiplying potential earnings.

There are three national platforms, the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd, available for trading in commodities.

All the three national bourses have electronic trading and settlement systems. These exchanges are permitted to allow trading in all commodities. Besides the three, there are more than 20 other regional, small and single commodity exchanges that trade in various commodities.

Several already-established equity brokers have taken membership with the three national exchanges. Brokers such as Sushil Global Commodities, Refco Sify Securities, Motilal Oswal Commodities SSKI (Sharekhan) and Geojit Securities are offering commodity futures with some of them also offering trading through the internet just like the way they offer equities.

Players point out that not much money is needed for trading in commodities and one can start off with small amounts. These can be used as margins, payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract, they added.

Commodities available for trading vary from bullion to agricultural commodities such as soya, rubber, cardamom and guar. The futures markets have delivery and cash settlement systems.

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. But in case you plan to take or make delivery, you need to have warehouse receipts.

The option to settle in cash or through delivery can be changed as many times as you want till the last day of the expiry of the contract, market sources added.

You will need one bank account and a separate commodity demat account just like in stocks. Besides, normal account agreements with the broker will be required.

PAN numbers will be required but if you are farmer, a reference from the APMC market where you sell or deliver your goods will be asked for instead of the PAN number.

Typically, the brokerage charges range from 0.10-0.25 per cent of the contract value but will be different for different commodities. Market entities say that transaction charges range between Rs 6 and Rs 10 per lakh/per contract usually. "It will also differ based on trading transactions and delivery transactions, they add.