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Types of commodities you can invest in

Investing in gold is commonplace in India. You have seen your parents and grandparents swear by the precious metal. Come hail, come shine, they know gold can bail them out of financially troubled times. You also must have heard in the news of how people invest their money in natural gases and petroleum. But did you know that you could also invest or trade in foodgrains? Rice, wheat, soybean...even items like cotton and cocoa allow you to put your money in them! So, before you start investing, it is important to know about the different types of commodities available at the exchange. Let’s look at them in detail:

Bullion: Bullion refers to gold and silver. Basically, bullion commodities are considered as hedge against inflation. This is why people invest in bullion, especially gold. They feel it is the ideal choice for long-term wealth creation and stability. Sure, bouts of global crisis, fluctuating value of currency and rickety economic policies do have a bearing on the bullion price. But, decades-long data indicate that it can outperform other asset classes like stocks, bonds and real estate. As for silver, although it’s not really considered as hedge against inflation, this metal is majorly used for industrial purposes. This means that there is a robust demand for this commodity too.

Base metals: Nickel, copper, lead, zinc, sponge iron, steel and aluminium are some of the base metals traded in the Indian commodities market. These metals are mainly used by manufacturing companies for production. Retail investors also trade in these commodities with a long-term perspective. However, you need to remember that geopolitical turmoil and changing currency exchange rates can have an impact on prices of base metal. Therefore, it’s important to do thorough research to estimate the value of base metals properly. Knowing or gauging long-term demand and supply of a particular metal and its average cost of production can help you profit by investing in them.

Agricultural commodities: Many products grown on agricultural farms are traded in the commodities market. Wheat, jeera, corn, soybean, soy oil and sugar are some of the tradeable agricultural commodities. Investing in these items is almost an art form because you need to assess its future global demand. Not only that, factors like weather and crop production also have a bearing in such investments. This is why people do extensive research before investing in these commodities.

Energy-based commodities: This includes crude oil and natural gas. These are also industrial commodities with high price volatility. Before investing, take a look at its average cost of production. If the price of energy-based commodity is closer to its cost of production, it has the potential to fetch good returns over the long-term.

How to invest in commodities?

You can put your money through various routes such as commodity futures, e-products, commodity ETFs and commodity stocks.
What are the benefits of investing in commodities?

Diversification: The performance of commodities investment has very low or almost negligible correlation with the performance of debt and equity investment. Hence, commodity investments can help reduce risk by diversifying your portfolio.

Leverage: You only need to pay a small margin to take position in commodities.

Liquidity: Energy-based commodities and agricultural commodities are more liquid in nature. Liquidity can also depend on supply and demand for that particular commodity.

A good hedge against inflation: Commodities maintain their price even during inflation.

Transparency: Commodity futures are traded on electronic exchange and thus offers a fair degree of transparency.

High returns: Since commodity markets are subjected to higher price volatility, it has the potential to fetch you high returns.
In a nutshell, it’s important to know the diverse world of commodities. That’s because the more you learn about them, more such money-making options can open up before you. There’s also the matter of diversification. These investments can help reduce the risk levels, especially in times of economic strife.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.