The world of investments has a vast number of financial instruments such as shares, stocks, bonds and many more. Commodities, too, are one such investment option available for investment. Even though the commodity market has grown substantially in the last few years, the participation of retail investors in commodities is still limited. However, the commodity market has huge potential and making the right investments in commodities can help improve the performance of your portfolio.
What are commodities?
Commodities are tangible goods that are either naturally occurring or can be agriculturally grown. Commodities are consumed directly or used as raw materials for manufacturing finished goods meant for public consumption. All commodities can be classified under either of the two categories-
- Soft commodities- Those, that are grown and cannot be stored for an extended period. Examples of soft commodities include agricultural products such as grains, tea, coffee, and livestock.
- Hard commodities- Those, that are obtained through mining and extraction. Example of hard commodities includes oil, metals and natural gas.
Why should you invest in the commodities market?
Commodities play an important role in the development process and hence are building blocks of every economy. Commodity investments can help you diversify your portfolio into a different asset class apart from shares and bonds and enhance the overall returns of your investments.
For many of you, the general perception is that the commodity market is complex and hence not something that everyone can dabble into. However, commodity investments can fetch you handsome returns.
Here are the top three reasons to invest in commodity markets for all types of investors-
1. To diversify your portfolio
One of the key factors that determine the success of your financial planning is diversification. Diversification with regards to investment portfolio means investing in various assets that are not correlated to each other of your portfolio in different asset classes. Most of you would be diversifying your portfolio in five major asset classes which include cash, shares, fixed income securities, real estate, and gold. In times of increased volatility in the markets, you are either holding on to cash or investing in gold. Gold is considered the safest haven for investment in turbulent times and Indians tend to invest in gold because it is considered as a symbol of wealth and has ornamental value. However, in reality, the gold in your portfolio is your investment in commodity and just like all the other commodities the returns from it are independent of the returns generated by stocks and bonds.
Just like gold, there are other commodity investments whose returns are not correlated to equities and bond markets. The price of any commodity investment is a function of demand and supply and by doing proper research and analysis you can make profits from commodity market investments.
2. To provide a hedge against inflation
Inflation is the general rise in the price of goods and services over time. For any investment to be fruitful, it is important that the returns generated beat the rate of inflation. Higher inflation effectively erodes the real returns generated by your investments in stocks and fixed income securities. However, in the case of commodities, higher inflation relates to the higher price of commodities. So, unlike other investments, your commodity investments will result in a strong performance when inflation is high. Given the current situation when inflation is constantly on the rise, investing in commodities will provide a hedge against inflation.
3. To improve potential returns
The prices of individual commodities can fluctuate significantly due to several factors such as demand and supply, the impact of natural calamities, exchange rates and the economic health of the nation. The rise in infrastructure projects in a developing country like ours and also globally has had a positive impact on commodity prices.
As the commodity market is still an untapped arena, many of them are trading at a lower price than their actual potential. Proper research and effective implementation of investment strategy in commodities can help investors improve the overall returns on their portfolio.
What are the various options to invest in commodities?
The commodities market is a very deep market and investors have many investment vehicles to access it. Let us look at the various options available for investors to buy and sell commodities
1) Investing in the physical form
Commodities such as gold, silver, etc., are bought by investors in physical form. However, not all commodities can be bought in physical form as it has its drawbacks of storage and spoilage. Even in the case of precious metals security and insurance increase the cost of your investment. Moreover, most of the time you want to invest in a commodity, not for end-use but to make profits if you anticipate that the price will increase. So, buying a commodity in physical form, except for precious metals, is generally not recommended for retail investors.
2) Investment through commodity futures
One of the most common ways to trade in commodities is through a commodities futures contract. It is a standardised agreement to buy or sell fixed quantities of the underlying commodity at a predetermined price on a specific date as mentioned in the contract. Also, commodity trades happen electronically through commodity exchanges where investing real-time commodity is possible. Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX) are two of the many commodity exchanges present in the country which help investors trade in commodities. All the commodity exchanges come under the regulation of the Forward Markets Commission (FMC).
3) Commodity ETFs
Commodity ETFs are another popular investment option available for retail investors to diversify their holdings in commodities. Commodity ETFs invest in a single commodity and physically hold and store it, invest in a commodity futures contract or invest in a commodity index that tracks the performance of multiple commodities. Investors can invest in commodity ETFs electronically in their Demat account.
4) Commodity Stocks
Investors who are not comfortable with investing in commodity futures or ETFs can diversify their portfolio in commodities is by investing in commodity stocks. Commodity stocks are stocks of those companies which are directly or indirectly related in the manufacturing process of the commodity and hence have a positive correlation with the commodity. For example, if you feel that the steel prices are going to increase, then you can invest in the stocks of various steel companies listed on the exchange.
5) Mutual funds
One of the biggest reasons for an investor to shy away from commodity investment is that commodity investments require a lot of time, knowledge and expertise to make the right investment choices. However, now SEBI has permitted mutual funds to invest in the commodities market through the exchange-traded commodities derivatives (ETCD) route. Thus, retail investors can now participate in commodity markets in a structured manner through professionally managed mutual funds.
Commodities are a broad and diversified asset class that offers a great investment opportunity to investors. Given the high inflationary pressure and volatility in the markets, dedicating a small portion of your portfolio to commodities will help enhance the overall performance of your investments.
Investing in commodities may look intimidating and you may feel a little hesitant to explore your options, but correct guidance from an experienced financial advisor can help you understand the nuances of commodity markets and make the right investment decisions as per your investment needs. Financial advisors at IndiaNivesh possess the requisite expertise and experience to help and guide you with investments in commodities markets.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Open Ended Mutual Funds – Meaning, Advantages & Disadvantages
What Is Open Ended Mutual Fund? Investing in open ended mutual funds can be ideal for novices and experienced investors alike. Understanding how it works, and knowing about its advantages and disadvantages can help you make the right investment decision. Understanding Open Ended Mutual Funds Typically, every mutual fund gets launched through a New Fund Offer [NFO]. Hence, if you have applied for a mutual fund during the NFO period, you could get fund units at the NFO price. However, after the NFO ends, the mutual fund is officially launched as an open-ended fund. By investing in an open-ended mutual fund, you can enter and exit the fund at any time. On the other hand, a close ended fund does not permit investors to enter or exit after the NFO period has ended, that is until maturity. Mutual funds are a type of open-ended fund. It's NAV changes every day due to stock market movement and the bond prices of the fund scheme. You can buy an open-ended mutual fund at its Net Asset Value (NAV) that is based on the fund’s underlying securities. Open ended fund investments are valued at fair market value that is also known as the closing market value of listed securities. Unlike close ended funds, open ended mutual funds do not have a fixed period for maturity. An open-ended mutual fund does not trade in the open market, and neither does it have a limit on how many units can be issued. Such funds typically invest in equity or stock markets. They are known as open ended funds because there is no lock-in time for such investments. Hence, you can cancel your investment at any time after investing in this fund type. For instance, on any working day, during business hours, you can request your AMC to make a fresh purchase or redeem your mutual fund units. Generally, such a request is executed on the previous days NAV or the present days NAV depending on the time of submission. Advantages of open-ended funds Easy liquidity - You can redeem your units of an open-ended mutual fund at any time based on your requirement and convenience. As compared to other forms of long-term investments, you receive the flexibility of redeeming your open-ended mutual fund scheme at the current net asset value. Transparency - You can view the historical performance of an open-ended mutual fund, unlike that of a close ended fund. In a close ended fund, there is no availability of track record and hence the performance of the fund over various market cycles is not revealed to investors. Thus, an open-ended fund can be a well-informed and wise investment decision. Systematic Investment Plan - A viable investment option for a majority of salaried class investors, open ended mutual funds are ideal because of the Systematic Investment Plans offered in it. Close ended funds call for lump sum investment and can be a risky approach for new investors. On the other hand, you can initiate a Systematic Investment Plan in an open-ended fund of your choice without having to worry about making lump sum investments. Disadvantages Experiences market volatility - Even though open ended funds have a highly diversified portfolio managed by the fund manager, they can still experience market risks. The NAV of an open-ended mutual fund could fluctuate based on how the underlying benchmark moves. Solely reliant on the fund manager - As a mutual fund investor, you do not get to have a say in determining the asset composition of your mutual fund. Instead, a fund manager who is highly qualified with requisite expertise in mutual fund management undertakes all decisions concerning the choice of securities in the mutual fund scheme. Conclusion New investors who are looking to understand the stock market can opt for open ended mutual fund schemes. Similarly, if you desire an annual return of 15 to 20%, open funds can be an ideal choice. Typically, all open-ended mutual funds are managed by professionals and experts in their field. Given that the NAV is updated on a daily basis and the fund is highly liquid, investing in open ended mutual funds can be advantageous. Because open ended funds focus on liquidity and transparency, it can be an ideal match for long-term and medium-term goals.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Bear Market Investment – How to Invest in a Bear Market
The stock market has been one of the favourite investment options for many investors. It passes through three major phases; bull phase, bear phase and consolidation phases. Making an investment in the bear phase is one of the trickiest tasks. This is because there is widespread pessimism in the market and the stocks keep making new lows. Therefore, to survive in a bear market, you must have good bear market investing strategies. In this article, you will learn how to make bear market investment. Let us first learnt the reason for bear markets. Reason for Bear Markets There are many triggers that take the markets into a bear phase. The global factors are the most common causes of it. And, a bad shape of the domestic economy further adds to the market woes. If we look into the history, unrest in the Middle East which affects the oil prices has always been a major reason for markets entering into the bear's grip. Moreover, instability in any part of the world also affects the stock market in some way or the other. Making bear market trading strategies in such a market can be tough because you cannot predict how worse the situation can go. Similarly, a fall in GDP of a country is another reason for bear markets. The slowdown in the economy leads to lower consumption and expenditure by the people. Here the market remains in bear mode until the economy shows signs of revival. Other factors that contribute to bear markets are double-digit inflation rates, unfavourable monetary policies, unstable political environment, etc. In order to counter these situations, you need to have solid investment strategies. So, let us learn about the strategies that can give you good returns during the bear market investment. Strategies for Bear Market Investment Purchase Index Funds When the market enters into a bear mode, purchasing index funds at lower valuations can be very fruitful. The index funds replicate the performance of the index like Nifty or Sensex. Buying index funds can be one of the good bear market investing strategies because when the market will start rising you can make huge returns. Like for example, people who bought index funds during the recession in 2007-2009 and hung in there made huge profits in 2015. So the best way to purchase them would be to keep investing a small amount at every lower level rather than purchasing them at one go. Buying Short and Long Term Puts You can make bear market trading strategies in the derivative segment to make profits in the bear market. When you feel that the market is entering into a bear phase and there are many long positions still existing, you can purchase short and long term puts on the indices. When you purchase puts and the market declines, you will make good gains with it. The options market move by a much larger percentage in comparison to the stocks, so even small put contract can give you huge returns and compensate for your losses in the long positions. These contracts need to be settled before the expiry period. Selling Naked Puts Selling naked puts is another strategy to tackle the bear markets. When you sell the puts that others want to buy for premium is called naked put selling. There are always many buyers in the bear market and you can sell them a put contract. Here, you make a profit of the entire premium amount if the put contract expires at similar or above the strike price. Therefore, the best strategy in the derivative segment during a bear market would be to keep selling short-term puts of good companies. Find Stocks That Perform Better During the bear market, the stocks trade at low prices. In fact, with the fall many good companies are available at very cheap valuations. Therefore, to take advantage of lower prices you must make bear market investing strategies by purchasing good companies for the long term. By holding stocks of good companies for the long term, you can create huge wealth for yourself. Furthermore, there are many stocks that do well in the bear market, all you need to do is research well and figure out such stocks. Purchasing stocks that are outperforming the market can help you make good profits even in the bear market. After understanding the strategies for a bear market, there are few more other things that you must do or be aware of in the bear market, they are as follows. Things to Consider in Bear Market A bear market is unavoidable and it is one of the phases of the stock market. When there are good times in the market, there would be bad too. Just remember the fact that good time will always outweigh the bad in the long run. Always balance your portfolio in the bear market. Allocation in the right assets or stocks is the key for good returns in the long term. Most successful investors make an investment in the bear phase and sell in the bull phase. Avoid margin trading during the bear market. Margin brokers allow you to trade more than you could potentially but you must not fall into the trap. The bear market is so powerful that it can wipe out your whole capital by way of margin payment. The best strategy in bear market is to purchase stocks and hold them for long period. There is always a temptation to short sell in the bear market. You need to control that urge because when you short sell a stock you hope to purchase it back at a lower price. But the market does not guarantee anything. It is very much possible that the stock price would rise after you short sell and hence, you must avoid it. The above mentioned are a few things that you must do or be aware of in the bear market. However, if you want to seek the help of an expert to make an investment in any type of market, you can contact us . We aim to protect your capital and help you earn profits with systematic investment under the guidance of our highly qualified experts.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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