Commodity trading in the exchanges is mainly to hedge the risks of producers, traders and arbitrageurs. But in the recent times, the participation of retail investors has been growing too, as they seem to have discovered a new avenue for investment. Gold is one commodity that has seen significant retail participation due to the availability of a large number of investment options. Silver, platinum and some non-ferrous metals too offer products for retail investors.
In 2012, an e-series product in platinum, two more gold-exchange traded funds and seven gold fund of funds were introduced in the market. The clearance to the Forward Contract (Regulation) Act amendment bill by the cabinet has raised hopes that the commodity market will see a significant increase in investor participation and the introduction of newer products in the near future.
Once the FCRA bill is passed by Parliament, it will pave the way for foreign institutional investors, banks and mutual funds to participate in the commodities market. This could be a game changer in terms of investor participation. Retail investors can also look forward to the launch of more products.
“In the international market, there are funds that invest in commodity baskets. Such products allow retail investors to hedge the risk of inflation in the commodities s/he consumes,” said Chirag Mehta, fund manager for commodities at Quantum Asset Management Company.
The FCRA bill also provides for the launch of options, derivatives on indices, weather, rainfall and freight. “Compared with futures contracts, options are more suitable for retail investors as lot sizes are smaller and they do not necessitate physical delivery of the commodity. They are also less risky,” said Tapan Trivedi, a senior analyst at JRG Wealth Management.
Index derivatives in commodities will help investors bet on a group of commodities rather than a specific product. “For an investor, indices will provide a barometer to indicate the movement of various commodities within the group,” said Vibhu Ratandhara, assistant vice-president for commodities at Bonanza Portfolio.
“Products like weather or rainfall derivatives may not be products designed specifically for retail investors. But they can certainly help those who trade in agro-commodities by indicating how various geological factors impact price movements,” he said.
Every year around this time, the equity market lobby raises the demand for the imposition of commodity transaction tax in the Union budget, which has been the case this year too. Such a tax, if it comes, can be a big dampener for the market, as it will affect the global price parity, and thus limit the hedging opportunity, raise traders’ cost of risk management and increase investors’ cost of trading on the domestic exchanges. This will also make the price discovery process inefficient and lead to an overall increase in price levels of commodities.
“Such a tax will impact trading and hamper volumes,” said Trivedi of JRG Wealth Management.
Calendar 2012 saw the National Spot Exchange introducing e-platinum, taking the total number of e-series products to seven. At present, NSEL has e-products in gold, silver, lead, zinc, nickel, copper and platinum, which are available in small units and can be held in demat form without requiring physical delivery.
According to Anjani Sinha, CEO of NSEL, the number of new accounts have gone up from 3.30 lakh in 2011 to 7.60 lakh in 2012. “The holdings under e-series products are today valued at Rs 370 crore. Most of the investments are in e-gold and e-silver. While profit booking has been high in non-ferrous metals, investors prefer to hold their investments in gold and silver for longer periods,” he said.
Among commodities, gold effectively plays the role of a diversifier as it is considered a safe haven during troubled times. Hence, the number of products and investments in gold has been growing steadily. Two more gold ETFs and seven gold funds of funds were launched in 2012. Gold ETFs allow investment in the metal in paper format while fund of funds permits systematic investments. The investment demand in gold between January and September this year has been 199 tonnes.
The Multi-Commodity Exchange has products in gold and silver for retail investors. The gold guinea contract with a lot sizes of 8 gm and the 1 gm gold petal contract account for around 15 per cent of the total gold volumes traded on MCX. Silver Mini, a 5 kg contract, and the 1 kg silver micro contract target retail investors. zz