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With India being predominantly an agriculture-oriented economy, the journey from commodities in physical trade to the futures market has been effortless. India has been able to absorb the concept of commodity futures trading with great ease and the future looks upbeat with rising demand for raw materials. Although the current global economic scenario may lead to slow growth in demand, the potential for consumption growth is surely positive in the long-run. This is because the emerging and developing economies are largely facing the need for increased demand for raw materials on account of development of infrastructure and also as rising wages lead to growth in consumer spending. The situation is different from the advanced economies where consumer spending is witnessing a slowdown due to the ongoing financial crisis. Even though the emerging and developing economies are not de-coupled with the global crisis, the major supportive factor for commodities demand from these countries is the fact that domestic consumption is rising and India is no exception.
With that, the last few years of growth in the commodities space has been phenomenal and one can say that the Indian commodities market has matured. This maturity can not only be seen in terms of volume growth in the business but also with the recognition of commodities as an asset class. Despite government reservations towards the commodities sector, growth in the commodities futures market has not been restricted and the turnover on the national level exchanges have grown at a blistering pace, from a daily average of around . 14,000 crore in 2006-07 to the present . 85,000 crore a day. Going forward, reforms in the sector will help to allow participation of financial institutions, banks and foreign entities and lead to greater participation and further growth in commodities.
Although the traditional Indian investor has always classified investments as equities or gold, the change has been finally seen in the last few years as the modern Indian investor is now more receptive to new investment ideas. Time and again, investors are always reminded to not put all eggs in one basket, meaning to diversify their investment portfolio in order to benefit from the differences in returns. Having gold in a portfolio not only offers protection but also increases the risk-adjusted return of the portfolio along with liquidity. In the wake of the current global financial crisis, gold has emerged as an important risk management tool for financial soundness.
Commodity futures returns vary with each stage of the business cycle and perform well in the early stages of a recession, a time when equity returns generally disappoint. During the early recessionary phase the returns on both equities and bonds are negative but the return on commodity futures during this phase is positive. In the later stages of recession, commodity returns decline, but this is generally a good time for equities. Hence, commodities perform best under expansionary phase. According to a CME study, diversifying a portfolio to commodity futures can increase overall returns by as much as 50% with comparable risk.
The safe haven attribute of precious metals help protect the portfolio from sudden unexpected (systemic) financial crisis that also include natural disasters, political tensions and disruptions, bankruptcy, debt default, currency depreciation, inflation etc. In such a scenario, while the traditional financial assets suffer a setback and see decline in value, prices of precious metals witness a significant rise. The inclusion of precious metals in one's portfolio is akin to seeking insurance for financial assets. If we consider the comparative returns of gold against equities in the international (2000-2011) and domestic markets (2004-2011), gains in domestic gold prices were more than that in the international markets due to the rupee depreciation. Had one invested in gold in 2008, then one's portfolio would be safe-guarded against financial uncertainties.
As commodity markets have matured, so have investor preferences. With time, we have been seeing a change in demand trends, leading to decline in share of jewellery in total gold demand. The commodity is seen more as a pure investment. Within gold investments in India, an investor now has various investment options available. One can be a physical trader or can have an ETF gold trading account. On the other hand, an investor can also venture into this investment category through E-series on the National Spot Exchange or trade commodity futures platform. In the ETF space, assets under management (AUM) have increased from around . 1,500 crore just a few years back to around . 8,000 crore now, making it evident that investor preference have changed over time and are moving from holding the physical asset to an investment asset.
With Asian economies growing at a phenomenal pace, demand for commodities is expected to rise in the future. And from a retail investor's perspective, the Indian commodities market offer smaller contracts, thus helping one venture into this market without huge positions. Ultimately, diversification is the key to investment management.
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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
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Tax Saving Mutual Funds Online
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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
- HDFC TaxSaver
- ICICI Prudential Tax Plan
- DSP BlackRock Tax Saver Fund
- Birla Sun Life Tax Relief '96
- Reliance Tax Saver (ELSS) Fund
- IDFC Tax Advantage (ELSS) Fund
- SBI Magnum Tax Gain Scheme 1993
- Sundaram Tax Saver
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