Many investors consider trading in commodities as risky. The volatility and risk involved in the commodity markets resist people from investing in this domain. However, a well-planned commodity investment can be very beneficial for your portfolio. Amit Sajeja, Analyst at Motilal Oswal Commodities told Zee Business Online, “It is a misconception that commodities are more risky, commodities are not as volatile as equity derivatives and due to low trade margins of 5 to 10 per cent, it is always a good option to invest in commodities over equity derivatives. International commodity market is an over $2 trillion market, much larger than the equity or a derivative market.”
Let’s decode, what all benefits do commodity investments offer:
1. Option for diversification:
Commodity investments can diversify an investment portfolio. It often happens, when bonds, interest rates, and stocks fall, commodities rise. The reason why factors responsible for fluctuations in stocks and bonds, do not impact returns on commodities in the same manner. Hence, the commodities move differently the whole together from other asset class under different economic and geopolitical situations.
2. It offers protection from inflation:
Inflation causes depreciates currency. This hampers the real value of financial assets like stocks and bonds but does not really affect commodities. In fact, it helps them maintain their value and price even during high inflation. In such situations, investors can opt for hard assets like gold and other precious metals.
“An investor should invest 10 to 15 per cent part of his portfolio into gold, as it has done well in the Indian commodity market. Even in a worst case scenario gold offers a minimum return parallel to inflation rate,” explained Sajeja.
3. A great liquidity option:
Commodity investments are more liquid in nature, unlike investment in like real estate. However, investment in commodity futures offers even higher liquidity as it is easy to buy and sell commodity futures in the market.
4. Allows to trade even at low margins:
One of the most beneficial thing with commodity investment is that an investor in commodity futures can also trade with less money in hand. In this fashion, an investor can play with higher positions with low funds invested. An investor can trade with a certain amount of margin deposited with the broker, which is much lower than the required amount of money.
“The margins for trading in commodities is lower than equity derivatives. Exchanges have kept it at 5 to 10 per cent, where an investor can play on the trade worth of full values with less money,” mentioned Sajeja.
5: It offers higher returns:
Commodity markets experience huge fluctuations in prices, due to its highly volatile nature. However, smart investors can take benefit of these price variations to make profits. A greatly timed, well-planned commodity investments can easily offer higher returns than investments in any other asset.
“The probability of intraday fluctuation in equities are much higher than commodities. Copper has been moving constantly between Rs 300 to Rs 500 per kg for over 10 years now,” as per Sajeja.
What Warren Buffett said about commodities?
Warren Buffett in the Berkshire Annual Meeting 2007 said, “You can find some businesses with minimal capital investment. See’s Candies does not require much capital investment. It’s a small business, but a wonderful business, a far better business, adjusted for size, than any steel or oil business. We do everything we can to make it bigger. We do not have a bias towards any commodity-related business. If we have any bias, it’s against”.