By Prathamesh Mallya
A decade ago, investment in security and exchange instruments (stocks, bonds and commodities) was considered a gamble by many in India. This perception has, however, changed over the past couple of years. Today, the same set of investors can be seen investing in multiple instruments, be it mutual funds, stocks, and commodities.
What’s the reason for this sea change? There is more than one. Let’s find out what is bringing in hordes of investors to such unconventional investment instruments, especially commodities.
- Simplified Trading: Over the past few years, broking firms have made sizeable investment in trading platforms. Such investments have largely been focused on simplifying the investor journey. Earlier, opening trading and demat accounts used to take anywhere between two to three weeks, in some cases even months. Leading brokerages have cut this turnaround time down to less than an hour, that too, without making an investor step out of her home.
We’ve also seen a rise in rule-based investment engines and across-the-board technology integration to trading and investment. This has empowered investors with low entry barriers to make informed investment decisions while trading in commodities.
- Hedge against Inflation: Empirical data suggests equities and bonds, as asset classes, underperform in an inflationary environment, while commodities tend to fare better. There is also a negative correlation between equities and commodities. Investors use commodities as a hedge against market dynamics. In a mixed portfolio of equities, commodities and bonds, commodities tend to fare better than other instruments.
- Millennial investors: India has one of the largest pools of youth with the majority of population below the age of 40. This rising mass of millennial investors is well-read and well-educated. Investors today are more confident to go beyond conventional investment instruments such as real estate and bank deposits. They look at alternative instruments like commodities to ensure optimal return on investment (ROI) as per seasonal demands.
- Use of banking options: Banks have good exposure to commodities in India, something that continues to amplify. Food credit extended by banks is a classic example in this case. Further, institutional measures such as the Essential Commodities Act and Electronic Negotiable Warehouse Receipts (e-NWRs) have safeguarded the interest of all stakeholders.
This has prompted banks to increase their coverage of commodities trading. The use of banking options has increased the participation of retail investors within the commodities space, especially in a post-Covid scenario.
- Rule-based investments: The price action in commodities is determined by various factors such as agricultural produce, manufacturing output, exports and rainfall besides others. These factors enable an investor to leverage predictive analytics for their investments.
Nowadays, brokerage firms offer state-of-the-art investment engines powered by rule-based methodology. These investment engines analyze more than 1 billion data points before giving any recommendation. It can enable retail investors to invest in commodities and enjoy a touch-of-the-button experience.
These are some of the top reasons driving hordes of investors into commodities. As retail participation increases from Tier II & III cities along with in certain rural pockets, it can be said that we haven’t even scratched the surface yet. The future looks promising.
(Prathamesh Mallya is AVP-Research for Non-Agri Commodities and Currencies with Angel Broking. Views are his own)