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.
