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.
Know the difference between investing in property vs buying one
In India, people buy properties for personal use or for investment purposes. While the majority buy a property for their own use, a healthy portion of the population looks to put their money in properties in order to create wealth in the long run. And because the justification to buy a property is different in both cases, the common factors taken into account when investing in property vs buying property are viewed differently as well. So, let’s look at a few factors to understand the difference between investing in property vs buying property. ✓ Location: To understand whether to invest vs buy property, here’s a tip - if you are buying a property for investment purpose, you would take a look at various emerging localities which can be profitable over the next few years. Deciding the location would depend more on your investment objective, whether it is medium-term or long-term. On the other hand, if you are buying a property for end use, you would look at details like amenities, neighbourhood and proximity to various facilities. ✓ Stage of construction: As an investor, it usually makes more sense to buy a property that is yet to be constructed. That’s because investing in under-construction properties has the potential to deliver quick returns. If you are buying the property in order to live in it, you would usually look at properties that are already constructed. However, that may not be the case at all times. It also depends on your need, financial preparedness and tax implications. But largely, it is the ready-to-move-in properties that are usually preferred by buyers. That’s because a delay in completion of a housing project can skewer your financial plan. ✓ Type of property: As an investor, if you are looking for a regular income, you would choose to go with apartments. If your objective is capital growth, you would consider to invest in plots. On the other hand, if you are buying it for your own use, you would make a choice based on what your family needs. Buying a plot in such cases wouldn’t make any sense. Factors like security, finishing of the house and maintenance facility would come into play here. ✓ Time horizon: Time plays a major role in such decisions. If you are an investor, you would choose a property type based on the time you have set yourself to earn a certain amount of money. For instance, if you have three to fours’ time, investing in pre-launch and under-construction projects would be preferable because its value usually increases that time period. For long-term gains, you could explore the option of investing in commercial properties. Investing in a plot can also be fruitful in the long run. As for an end user of a property, these considerations matter little. What matters most is convenience and the property’s very long-term potential. ✓ Valuation of property: If you are an investor, return on investment matters the most. Investment decisions are based on expected price appreciation over time. But that’s not the case for for buyers. In most cases, end users do not buy homes based on expected appreciation in property prices. For them, the emotional quotient is more important. ✓ Size of the property: If you buy a residential property for investment purpose, you would prefer a cozier house. That’s because smaller units are easy to let out on rent or on lease. On the other hand, if you are buying for yourself, you would prefer to buy a bigger house, although it mostly depends on family needs. To sum up, there are basic differences between and buying and investing in properties. Although you are buying the same house, the factors that drive your choices may be viewed differently.Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Investing versus trading in gold and commodities
Investing and trading are two sides of the same coin. That’s because both the approaches help in building wealth. The only difference between difference between trading and investing is that while investing money is done for a longer period of time, trading is more dynamic and is conducted over a day or two, or maybe a week tops. The same principles are applied while investing money in commodities too. So, let’s look at different scenarios that can help us understand the difference between investing and trading in detail.✓ Investors and traders generally prefer to deal in different commodity instruments. While investors, who have a medium- to long-term perspective, like to put their money in commodity stocks and exchange-traded funds (ETFs), traders usually prefer commodity futures. It is not to say that traders don’t dabble in forward trading in commodities stocks or ETFs, but they usually swear by commodity futures. A commodity futures contract is an agreement to buy and sell commodities at a specified price on a specific future date. Crude oil and agricultural commodities futures are short-term contracts that locks in the price of commodity a few weeks or months in advance. Traders take various factors into consideration to keep actively buying and selling on a regular basis. The investor, meanwhile, likes to bide his time, maybe even take over a year, before he plans to cash in on an opportunity. ✓ An investor plays the waiting game in order to evade the daily market volatility. A trader, meanwhile, uses several financial tools to figure out which instrument can make him money over a short period of time. To understand the difference between day trading and investing, we borrow a cricket analogy -- an investor is like Rahul Dravid while a trader is like a Virender Sehwag. Both can fetch you runs but in vastly different fashion. The reason the investor has a long-term perspective is because past data show that commodities like gold have usually fared well in the long run. Let’s take gold’s case as an example. In 2007, the metal was valued at Rs 10,800 per 10 gram. Today, it’s priced at Rs 31,800. This is the reason why investors usually have to be patient. A trader though usually uses experience, nous and technical know-how to make money over a shorter period. The objective here is to predict market volatility to make money. In short, investing is relatively less risky than trading. The commodity trading market, therefore, works for those who have a high risk appetite. ✓ An investor looks at the fundamentals of commodities. That means they consider various economic factors that would impact supply and demand of the commodity. But, traders do a technical analysis to predict the direction of the market. Since traders make predictions based on price movements of commodities, the focus is more on the commodity’s market price rather than the factors that affect the price. To sum up, both the practices require different ethos. While both may have the same destination, the paths chosen are different. It also depends on your risk appetite and time horizon. If you are new to trading in commodity-producing stocks, you could read more on reserves, rates of production, value of enterprises and net present value. Better still, you could seek the advice of a financial expert or professional to guide you through investing in commodities successfully.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Are you Investment ready?
*All fields are mandatory