Page 133 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes

Notes In 2003, the ban on commodity trading was lifted after 40 years in India. Now, more
and more people are interested in investing in this new asset class. While price fluctuations
in the sector could get rather volatile depending on the category, returns are relatively
higher.

Why invest in commodities?

Commodities allow a portfolio to improve overall return at the same level of risk. Ibbotson
Associates, a leading US-based authority on asset allocation estimates that commodities increased
returns between 133 and 188 basis points, at no extra risk.

Who should invest?

Any investor who wants to take advantage of price movements and wishes to diversify his
portfolio can invest in commodities. However, retail and small investors should be careful
while investing in commodities as the swings are volatile and lack of knowledge may result in
loss of wealth.
Investors must understand the demand cycles that commodities go through and should have a
view on what factors may affect this. Ideally, you should invest in select commodities that you
can analyse rather than speculate across products you have no idea about.
Investing in commodities should be undertaken as a kicker in your portfolio and not as the first
destination for your money.

What is commodity trading?

It’s an age-old phenomenon. Modern markets came up in the late 18th century, when farming
began to be modernised. Though the trade’s mechanisms have changed, the basics are still the
same.
In common parlance, commodities means all types of products. However, the Foreign Currency
Regulation Act (FCRA) defines them as ‘every kind of movable property other than actionable
claims, money and securities.’
Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you
are keen on taking a buy or sell position based on the future performance of agricultural
commodities or commodities like gold, silver, metals, or crude, then you could do so by trading
in commodity derivatives.
Commodity derivatives are traded on the National Commodity and Derivative Exchange
(NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including
grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities
that these exchanges deal in.
Trading in commodities futures is quite similar to equity futures trading. You could take a long
position (where you buy a contract) or a short position (where you sell it). Simply speaking, like
in equity and other markets, if you think prices are on their way up, you take a long position and
when prices are headed south you opt for a short position.

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