If you are an investor, it is not considered wise to put your entire deposit in one stock. It is better to diversify your investment by investing money in different good stocks. Talking about most investors, they prefer to invest in equity and debt funds rather than commodities. Like stocks, investing in commodities is also not completely safe, but it can be a better option for investors in times of inflation and uncertainty of the economy. Let’s increase our knowledge about investing in commodities so that our investment portfolio can be strengthened.
Hard Commodities and Soft Commodities
Investing in commodities means investing in gold, silver, wheat, rice, coffee, tea, oil and other metals. Commodities can be divided into soft commodities and hard commodities. Soft commodities produce crops like wheat, rice, and hard commodities include metals mined from mines like gold, silver. There are many ways to invest in a commodity such as an investor can invest in future contacts and invest in commodity-based mutual funds such as natural resource funds, basic or true liquidity funds and index funds, etc.
Profit in financial crisis
Diversification is the biggest advantage of investing in commodities. Commodity gains are generally very low or negatively related to gains from other major asset classes. The main reason for this is that when the prices of goods and services increase, the prices of the commodities that produce them also increase. If you keep these commodities in your investment portfolio, then the market can be taken advantage of.
Factors affecting the prices of shares and bonds do not affect commodities in the same way. In addition, commodities influence differently in different financial and geopolitical situations. Investing in commodities better protects deposit-capital against threats like war, natural disaster and financial crisis. In the time of war, supply is affected due to which there is a great possibility of increase in the prices of commodities such as oil and grains.
More liquidity of commodity futures
Investing in the commodity market gives more liquidity than investing in real estate. Buying and selling commodity futures is very easy and investors can liquidate their position whenever they want.
Low margin money and more trading time
To invest in commodity futures, one has to make margin money deposits with the broking house. It is between 5 and 10 percent of the total value of the deal. This is much less than the margin required to invest in other asset classes. In this way, investors can take a large position and earn maximum profit even in the least margin. Apart from this, the biggest advantage of investing in the commodity is that more time is available for trading in the stock market. For example, trading time on Multi Commodity Exchange (MCX) is from 9:00 am to 11:30 pm.
Increase in profitability due to higher volatility
The commodity is more volatile than all other asset classes. According to one study, it is twice as volatile as stocks, four times more volatile than bonds. Due to this, investing in the commodity becomes very risky for the Conservative Investor. Due to this it also gives the opportunity to earn more profit. However, it is not sensible to keep more investment in the commodity in the portfolio.
(Author: P Saravanan, Professor of Finance and Accounting, IIM Tiruchirappalli)
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