Investing? Don't rush into commodities

Gold has always been a trusted investment avenue. But in the past couple of years, exchanges and consumers have been widening the bouquet of commodities in their portfolio.

Until recently, one could trade commodities only in the the futures market, where you could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you can take a long position. When prices are headed southwards, you opt for a short position.

However, exchanges are looking to attract more retail investors. Hence, the National Spot Exchange (NSEL), has launched its e-series, which allows one to invest in commodities like they would in equities.

Investors can trade and invest in one trading unit of e-series and multiples thereof. One unit of e-series is equivalent to one kg of copper, zinc and lead. The clearing and settlement pay-in and pay-out are based on T+2 settlement cycles. Physical delivery of these metals is possible.

It functions just like the cash segment in equities, but offers commodities such as gold, silver and copper in the demat form.

You can invest in other metals such as zinc, lead, nickel, platinum and so on. Time for trading on this platform has been extended to bring it at par with world markets.

Through the e-series, one can now buy the metals in smaller denominations. NSEL plans to offer more commodities through this platform. At the moment, there are seven metals that are available through the e-series.

Through the e-series one can buy one gramme platinum (and its multiples) by opening a demat account. You could take the delivery in the form of coins, available in 8 and 10 gramme, at a cost of Rs 200, plus one per cent value added tax.

Anjani Sinha, managing director, NSEL says retail investors buy e-series typically with a time horizon of one year to a year-and-a-half.

But before you venture into commodities, it is important to understand these. For instance, base metals could be a good bet.

"The prices of base metals are expected to see an uptick by the end of the third quarter. This is because we could see some economic reforms being announced and the efforts being made to tackle the Euro zone crisis. And at the moment their prices have stabilised. So, to take advantage of this price movement one could have a small amount of exposure to these base metals, as their prices have corrected," say Ajay Kedia, managing director of Kedia Commodities.

When it comes to agri-commodities, though there are many options in this space, not many retail investors take part or are advised to dabble in these. This is because, these can be traded only in the futures market and are highly perishable; one can keep the commodity only till the life of the product. The price fluctuations are also high.

One usually invests during the sowing season as this gives investors an idea of future production and prices. Kedia says of all the volumes traded on the exchanges, 50 per cent of it is retail money. "But it's very difficult to segregate between speculators and investors," says Kedia.

<B>Invest with caution  </B><BR>

"It is important to understand what is underlying the commodity you are investing in. Some are more volatile than others. Precious metals are easier to understand than most agri-commodities," says C P Krishnan, whole time director, Geojit Comtrade.

So, don't put all your eggs in one basket. According to Krishnan, one should take advantage of cost averaging and invest in these commodities in a staggered manner, with small amounts over a period of time. But do not speculate and get jittery when prices tank.

It is advised to keep aside not more than 15-20 per cent for alternative asset classes (which includes commodities) of your total investments.