May We Help You? - Investing in commodities

With the stock market gyrating wildly and inflation refusing to budge from its high perch, commodities are a good bet to shield your investment portfolios.

In the past year, volumes in the commodity futures market as well as ETF products have grown significantly.

If you're willing to do the homework needed to zero in on which commodity to invest in, here's giving you a start by explaining the options available in commodity investments.

Futures market

The futures market is generally a place for traders and speculators. But if you're bullish on a certain commodity and want to stay invested in it, consider futures market as an option. MCX (Multi Commodity Exchange) and NCDEX (National Commodity and Derivatives Exchange) are the two leading commodity futures exchanges. While NCDEX sees highest agri-commodity volumes, MCX leads in volumes in metals.

Every commodity is listed as a contract; the contract size varies with each commodity. However, you need not pay the full contract price on buying it. You need to pay only the margin amount which is a percentage of the contract value fixed by the exchange. You would need to settle the contract's full value only when you keep contract open on the expiry date.

Commodity derivative exchanges do have an option for delivery. The most heavily traded commodities in NCDEX are chana, guar, refined soy oil, soy bean and guar gum in that order.

To trade in the futures market you need to open an account with a broker who is a member of one of these exchanges and link your bank account to it.

Spot market

To make commodity investment simpler for retail investors, the National Spot Exchange introduced e-series products in 2010. E-series products function in a manner similar to the cash segment in equities.

There are five commodities currently under e-series - gold, silver, copper, zinc and lead. The contract size is here is much smaller compared to futures market and when you purchase a commodity, it is stored in demat form in your account; you don't need to worry about safe-keeping in a warehouse. You can sell the commodity in your demat account whenever desired.

To start trading in e-series products you need to open a trading account as well as a de-mat account with one of the depository participants empanelled with National Spot Exchange.

ETF

Currently, only gold is traded as an exchange traded fund (ETF). These are nothing but mutual fund units listed in a stock exchange; gold ETFs are products of mutual fund houses. The former Benchmark Mutual Fund, now a part of the Goldman Sachs group, owns the largest exchange traded gold fund in India.

This mutual fund house came with a new fund offer for gold ETFs in 2007.

The money raised in the NFO was invested in gold, divided into units of one gram and given to investors.

After the offer period closed, the units were listed in stock exchanges for existing investors to sell/buy more and new investors to buy. All gold ETFs operate in this way.

You can buy and sell units of a gold ETF through the NSE or BSE stock exchanges. The units bought are stored in demat form in your demat account.

The demat account for equities can be used for gold ETFs too. Apart from ETFs, you can also look at some commodity funds if you want to take the MF route to commodity investment.

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