Skip to main content

Spread your bets on commodities

Investing in commodities can be hot and volatile. It is better you don't invest all your money at one go


   METALS were the best performing sector on Indian bourses in calendar year 2009. Compared to the BSE Sensex, which moved up by 81%, the BSE Metal index appreciated 234%.


   Such triple-digit gains may prompt some investors to think, If commodity stocks are such hot property, then commodities should be good investments in themselves.
   But returns in commodities can hardly be termed consistent.


   Consider this: In 2007, those who bought into commodities such as oil and ferrous metals saw their wealth evaporate. A year later, those who kept the faith on the ability of policymakers to review demand managed to generate profits.


   Data on commodities is very transparent. However, volatility is high in commodities and hence, investors must not put money in one go, but should average investments over a period of time


DERIVATIVES FOR DARING

Commodity futures are simple basic tools, which allows an investor to build either a long or a short position in a specific commodity. However, given the leverage involved and the mark-to-marked nature of the contract, most retail investors find it difficult to go this route.

ETFS ONLY IN GOLD

In India, barring commodity futures, there are few options for retail investors. Except for gold exchangetraded funds (ETF), there are no mutual fund schemes that buy metals or commodities directly due to regulatory reasons. Gold ETFs buy into gold and issue gold units of equivalent amount which can be bought by investors having a positive view on gold. There are seven such schemes available to investors. Investors have earned approximately 5% returns over the past one year from Gold ETFs.

EQUITY ROUTE

This brings us back to the equity route. Direct exposure to commodity manufacturing companies is good for those who can study such companies and assess the investment options in greater details.


   But the flipside is that companies do not always manage to reflect the performance of commodities they deal in. "When prices of essential commodities shoot up, it is highly likely that the government will interfere. This may lead to restrictions and in some cases suspension of trading in commodities," says Vinod Ohri, president (equities) of Gupta Equities. However, he advocates buying into the companies that manufacture commodities as the volatility in equities are less compared to commodity futures.


   There are experts who think that it is unwise to go for commodity stocks. When an investor is bullish on a commodity and ends up buying into a commodity stock, he is exposed to risks associated with the company management, accounting policies and sentiments in the equity market


MUTUAL FUNDS

Retail investors could invest in Gold ETFs or commodity funds to meet their investment needs. Over the last few years, mutual funds launched various commodity thematic funds. SBI Comma fund is the oldest offering here. Besides this, there are funds that track only energy or agro-commodities. However, most of them are new and do not have a past track record. Another risk of investing in commodity thematic fund is exposure to concentration risk. The fund manager has limited options left with him to diversify the portfolio. A recession in the global economy can leave the fund manager with a Hobson's choice.

 

 

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now