More retail investors venture into commodities

More retail investors venture into commodities

New Delhi: It’s not quite a mass stampede into pork bellies, but retail investors in India are increasingly venturing into the commodities markets, buoyed by a surge in prices that has outstripped returns from stocks.

While the growth has the potential to be explosive, trade in commodities comes with a warning—policy flip-flops that can be injurious to your financial health.

That isn’t about to stop Ankush Mehta, 23, a student at the Indian Institute of Foreign Trade in Delhi, who’s now sold on the market.

“I made some money on a gold futures contract. I purchased another contract and will be looking at silver once it stabilizes," he said. “I will be allocating 50-70% of my funds to commodities."

Mehta bought a 100g May-delivery gold contract on a futures exchange on 11 April by paying a 4% margin fee of 8,800. In about 10 days, he sold the contract and got 20,000 as gold had shot up during that time. He executed the trades himself on a portal.

Niti Kumar, 24, a student at the ICFAI Business School in Hyderabad, also picked up gold via a brokerage. She would like to dabble in other commodities as well.

“My father has been investing in stocks for the last 10 years. I have started investing in commodities," Kumar said. “When I pick up a job and have a steady income, I plan to invest in mutual funds also. Then my father and I can exchange tips!"

A high networth individual in Mumbai, who did not want to be named, has been allocating 40% of his investment to commodities for the last three years, shopping for contracts in gold, silver, copper and crude oil with a budget of 25-30 lakh a year.

“Commodities are as lucrative as equity markets. In fact, of late, even better," he said.

The Bombay Stock Exchange’s benchmark Sensex has fallen 13% since the beginning of this year to 17,847.24 points, reined in by concerns over high interest rates and rising input costs—those very commodities prices—that are bogging down earnings.

The Multi Commodity Exchange of India Ltd’s (MCX) MCXComdex, an index comprising metals, oil and agricultural commodities, has risen 3% to 3,424 points in the same period.

“Small investors would have grown as awareness of commodities is increasing," said Ananda Kumar, chief (corporate service) at the National Commodity and Derivatives Exchange Ltd (NCDEX).

Data from NCDEX shows 54.2 million trades were executed in 2010-11, up 23% from the previous year.

As large investors have sought refuge from the risky currency and equity markets in commodities, the smaller ones have followed in their wake.

The brokerages are, however, not falling over themselves in trying to sell commodities to smaller customers because prices are liable to fluctuate wildly in response to rule changes.

For instance, in 2007, the government banned trading in foodgrain and pulses without warning as it battled rising inflation and political sections blamed the futures markets. That sent prices plunging.

“Agri commodity is politically sensitive. This is the very big risk. People trade it, but the specifications are also very big," said an executive in Kotak Commodity Services Ltd.

Most of the investments are, therefore, taking place in metals that are less likely to face a clampdown in case prices rise sharply.

The regulation of small investors would come under the purview of the Forward Markets Commission (FMC), the commodity markets regulator, said its chairman B.C. Khatua. While investments were taking place in the segment, data was not available on numbers, he added.

“Any investor can invest. He should go to a reliable broker and he should understand that commodity markets are not like share markets," he said. “Commodities are not purely for investments. Some people use it for risk management."

While Khatua did not say what role retail investors had played in the growth of the exchanges, analysts said small investors have contributed to the growth in turnover. On MCX, the number of trades executed rose to 210 million in 2010-11, up 31% from the previous year, data showed.

Most investments are talking place on the commodity futures exchanges. But are the products on these exchanges suitable for small investors?

Not really, said Anjani Sinha, managing director and chief executive officer of Mumbai-headquartered National Spot Exchange Ltd, which trades spot contracts in commodities. Most of the lot sizes and fees on futures exchanges are designed for big investors, he added.

“There is a high margin cost to be paid upfront. Plus, when a futures contract expires, the investor has to either roll over a position by paying a fee or take deliveries," Sinha said. “The stock market equivalent for commodities are spot commodity contracts that can be held for as long as one likes."

Sinha said his exchange, promoted by Financial Technologies (India) Ltd, which has also promoted MCX, has a base of 6,000 small investors trading in gold, silver, copper and zinc, and he was looking to float agri commodities such as black pepper, guar gum and castor seed.

FMC’s Khatua said commodities trading could go more mainstream when banks and institutional investors are allowed to do so on the exchanges. “Institutional players would develop and reach out to small investors," he said. “These players would bring down the costs and risks for small investors."

Key facts on India’s commodity markets

•Futures reintroduced in 2003 after ban in mid-1960s on inflationary fears following India-Pakistan war

•Pending Forward Contracts (Regulation) Amendment Bill, 2006, seeks to modernize markets, strengthen regulator

•There are 24 commodity futures exchanges, including three national exchanges that trade online

•Data from the Forward Markets Commission shows the turnover on exchanges in 2010-11 was at 119.89 trillion

•Banks, institutional investors, foreign institutional investors not permitted to trade commodities

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