A concrete foundation or good learning is a must before branching out to any field in order to make a such venture successful — be it in business or in building a financial portfolio.
For proper portfolio diversification, one should try and invest a part of the money in commodities, as this asset class tends to offer the benefit of economic cycles. Indian commodities exchanges are going through a sea change amid the massive reforms in the Indian economy, and this is expected to result in huge trading volumes in this space.
Most investors are well versed with the equity market. Commodities work almost in the same manner, though there are some basic differences one we should be aware of before getting into it.
Sebi is the regulator for commodities, like equity, and one needs a demat and a trading account to trade in it. One should follow the circulars, instructions, rules and regulations issued by Sebi and the stock exchanges from time to time. Commodity trading is available on all the top bourses – be it MCX, NCDEX, NSE, BSE and ICE.
One important thing to note it that to get into commodity futures, one needs to develop the discipline of squaring off positions prior to expiry, if one is not intending to take delivery. If one doesn’t want physical delivery, then it is a must to wind up the position or roll over the same to next month before it goes into the delivery process.
The market is still 17 years old since its inception in 2003, while international exchanges are centuries old. It is trying to get the recognition worldwide with its world-class mechanism and innovative products. One should try to trade in liquid contracts like bullion, metals, energy, oil seeds, spices and guar. One can enjoy trading in indices like iComdex bullion, Agridex and Metal index, which are cash settled. Now, Indian commodities exchanges are also equipped with options in which margin requirements are lesser than to futures. Investors should take positions in options based on research-based advisory to enjoy a better risk-reward. Many farmers and producer organisations (FPOs), physical traders and producers are considering this option in goods to hedge their positions on the exchanges.
One should track margins too. There are specified percentages of margin on commodities, which are calculated on the value of the commodity contracts. An investor has to deposit the margin upfront on the trading account before taking buy/sell positions in commodities. In some special cases, the exchanges impose special and additional margins on commodities to curb excessive volatility.
In India, trading in commodity futures starts at 9 am and goes on till 5pm on NCDEX (for agrocommodities), while trading continues till 9 pm for international markets-linked agro-commodities like cotton, soy oil and CPO and till 11:55 pm for commodities such as bullion, base metals and energy contracts. Few other agrocommodities also trade for long hours.
The extended trading hours create additional opportunities to take the advantage of the volatility in international markets.
Various factors such as demand-supply math, weather, fluctuations in currencies — mainly dollar — and various economic activities across the globe — mainly in the US and China – have a bearing on commodity futures. It is important to keep a close watch on the global markets, because India is the price taker for most commodities from the international exchanges like COMEX, NYMEX, SHFE and LME.
An excellent portfolio can be created, assembling various classes of commodities such as agro-commodities, bullion, base metals and energy. The biggest benefit here is that it can strike a perfect balance in the portfolio. To conclude, one must take informed decisions and go for discipline trading in order to maximise the benefits.
(DK Aggarwal is the CMD of SMC Investment and Advisors)