Why Invest in Commodities?

Investing in commodities can be a good way to diversify your portfolio and spread out risks while hedging against inflation. You may also benefit from the rising demand for specific commodities and their future growth prospects as well as taking advantage of rupee depreciation. 

Stocks usually offer long-term growth potential and may generate dividends, making them better options for wealth-building over a sustained duration. On the other hand, commodities are more speculative but may offer a hedge against inflation while providing higher returns amidst market volatility.

Investments in commodities may be a good prospect for any investor as a result. Let us look at the key reasons below. 

Why Invest in Commodities in India? 

Here are some of the key reasons to invest in commodities: 

Portfolio Diversification

Commodity trading can help lower portfolio risk as commodities have little correlation with bonds and stocks. 

Hedge Against Inflation

Gold has always been one of the traditional safe-havens when it has come to hedging against inflation. Along the same line, crude oil and a few metals have also seen benefiting during periods of increasing inflation, based on their demand and supply.

Economic Demand and Growth Prospects

The rising consumption of energy and metals in countries like India may enhance demand in the long haul. 

Infrastructural Growth and Government Policy

Increasing demand for prominent industrial commodities like copper and steel and their requirement for infrastructural growth may also lead to profitable trading opportunities. 

Rupee Depreciation and Commodity Prices

The cost of imported commodities, such as crude oil and metals, in a way depends on the rupee. Rupee depreciation against the dollar can lead to increased prices for such commodities.

Physical Ownership of Assets

Commodities, including precious metals, may be perceived as physical or actual assets, thereby offering value for investors who find them safe havens. 

Easier Trading of Assets

Commodity ETFs (exchange-traded funds) offer investors a more straightforward approach to investing in commodities. They can gain more exposure to a wider commodity basket, enabling better management and diversification. 

Ways to Invest in Commodities in India

Now that you know about the reasons to invest in commodities, here’s how you can invest in these assets - 

Commodity Futures Trading on Indian Exchanges

The MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivatives Exchange) are the two primary ways to invest in commodities. They are both the primary commodity exchanges in the country, although the former concentrates more on non-agricultural items like energy and metals, while the latter focuses more on agricultural commodities such as spices, pulses, grains, etc. 

MCX is a commodity derivatives exchange that enables online trading and transactions while offering a price discovery and risk management platform in the commodity derivatives category. 

NCDEX is a similar commodity derivative exchange, enabling online trading and price discovery in the agricultural commodity segment. The focus on agricultural commodities may lead to lower liquidity levels than the MCX. 

How Futures Trading Works in India

Futures trading for commodities comes with contracts for buying or selling any particular quantity at predetermined prices on any future date. They are traded on exchanges such as the NSE or MCX and used for speculation and hedging. 

Commodity futures have underlying clauses for the buyer to purchase and the seller to sell the underlying commodity at the pre-fixed date and price. These contracts are also standardized for quantity and quality.

At the same time, traders have to deposit collateral or margin to open a position (a small percentage of the value of the contract). Traders may take physical delivery on the expiration date or close the position before expiration. They may also settle the contract in cash. 

Investing in Physical Commodities

Another option for commodity investments is choosing physical commodities, such as silver, gold, and even other agricultural products.
Silver and gold are two of the most popular commodities that can be physical stores of value, while investors may buy these metals formed into bullion with a standard purity and size. Of course, there are considerations like security, storage costs, logistics, physical handling, and so on. 

Commodity ETFs and Mutual Funds

Several gold and silver ETFs (exchange-traded funds) give investors a chance to add these precious metals to their portfolios. These funds invest in bullion and aim to track the performance of the prices.

ETFs are listed on exchanges and may be bought/sold as freely as stocks. One unit of a gold ETF is indicative of 1 gram of physical gold with the highest possible purity (24K), and the AMC (asset management company) with responsibility for the same will store 24K gold bullion that is equivalent to the number of ETF units in a secure vault. 

There is no option to get physical delivery of bullion while selling the units; instead, you will get the cash value of the number of units sold. Similarly, a silver ETF will invest in silver bullion with the highest fineness and purity (0.999), representing 1 gram of physical silver in one unit.

There are several other commodity mutual funds, including natural resources funds (those which invest in entities dealing with oil, minerals, gold, petroleum, etc.), future funds, combination funds (invest in futures and basic commodities), and index funds (managed passively). 

Stocks of Commodity Companies

Another option is to invest in stocks of commodity companies, i.e., those involved in sectors like mining, energy, agriculture, and others. Some of the top names in this space may include Hindalco, HPCL, Hindustan Zinc, IOC, and many others. 

Conclusion

As you can see, there are several reasons to invest in commodities, including how they can hedge against inflation and the potential to diversify your portfolio for lucrative future profits. Higher domestic or global demand, along with infrastructural requirements, will also keep several commodities at the forefront, making commodity trading a good option for investors. So, if you’re looking to explore this segment, consult an experienced industry platform and begin your commodity trading journey today.