Invest in commodities to hedge against inflation

Written by Sandip Das | Updated: Feb 28 2011, 08:14am hrs
With inflation and commodity prices on the rise, theres a pressing need for investors to tweak their investment strategies. Investing in commodities can be one solution for hedging against rising commodity prices. Investing in commodities has been on the rise since the economic meltdown of 2007.

As the markets have grown, new breed of investors that includes high net worth individuals (HNIs) and even retail investors have made commodities as a part of their portfolio. Priti Gupta, executive director, Anand Rathi spoke to FEs Sandip Das range of issues.

Excerpts:

Why should an investor take up commodities

Unlike stocks and bonds, commodities are real assets, comprising inherent intrinsic value based on their actual commercial or industrial application. Commodities price fluctuations do not have positive correlation with stock market and therefore, these are best tools to diversify portfolio. Moreover, investing in commodities that rise with inflation provides a natural hedge against inflation.

Therefore, commodities not only help in portfolio diversification, they also provide hedge against inflation. Hence, off late, investing in commodities has become an essential part of portfolio management.

How has investment in commodities have evolved in the country

Till recently, investment in commodities was confined only among the physical market traders and stockiest. It was not possible for a common man, not connected with commodity trade, to invest into commodities and to book profit, when the prices go up. Since launch of electronic futures trading in 2003, large number of individuals started trading in commodity futures, but futures contracts do not provide investment products, they are essentially hedge or trading instruments. Prior to launch of e- series by National Spot Exchange Limited (NSEL), there was no cash segment of commodities, we had only futures. Launch of e series of products have opened up new vistas of investment in commodities. The USPs of e-series products have been electronic trading, settlement and holding in Demat form, uniform pricing, convertible into physical form at any point of time and zero storage cost. This has attracted large number of retail investors to invest money into commodities through e series products.

How big is the commodity investment market through e-series launched by NSEL

At present, e series instruments launched by NSEL are available in gold, silver, copper, zinc and lead. The combined daily turnover recorded by NSEL in these products is around R1,000 crore. NSEL plans to launch 15-16 other commodities under e-series during calendar year 2011. Therefore, we can easily assume to have a vibrant cash segment of commodities recording a daily turnover of R3-4 thousand crores during next one year. Hence, this will be a huge market segment with large number of retail participation. The growth of turnover on NSEL during last 1 year is a clear cut indicator.

What are the commodity investment products for investors

For traders and people with higher risk appetite, I would like to recommend trading through commodity derivatives which is future contracts traded on futures exchanges. For small and retail investors, who do not believe in taking speculative bets, the e-Series products offered by NSEL. This product is ideally suited for retail investors, HNIs looking at diversifying their portfolio by investing into commodities as well as investors, who follow systematic investment plans. Since there is no storage cost in e series products, it is good for long term investors, who wish to invest into commodities like gold, silver, etc. from long term perspective.