Many investors who invest heavily in equities struggled in the market crash and during the times of inflation. These economic uncertainties made more investors move into commodity investments. The commodity investments have several advantages over stocks and bonds. This is the reason why commodities have become a well-established asset class in the Indian markets in the last few years. What has most attracted the investors is the transparency, high liquidity, risk management, low margin for trading, and several benefits to the farmers of the country. In short, there are many benefits of investing in the commodities which we are going to discuss here.
Here’s a look:
5 Main Benefits of Investing in Commodities
After conducting an in-depth analysis, we found that keeping commodities in the portfolio hold certain advantages. On the basis of that we are going to discuss the main benefits of investing in commodities which are as follows:
Liquidity & Transparency
In recent years, the commodities become one of the most established asset classes in the recent years although the commodity trading is relatively new in the Indian commodity market when the global commodity futures exchanges have been functioning from decades. Anyways, what attracted the Indian investors is to trade in the commodity market is the transparency level in process and liquidity of this asset class.
And by transparency in the process, we mean “No scope for manipulation”. If you don’t know but in the commodity market, the buy and sell orders take place on the electronic exchange platform where the identity of buyers and sellers remains anonymous which thereby enabling transparent price discovery.
The liquidity of commodity futures is quite high which allow investors to liquidate his/her position whenever needed. Unlike equities and bonds, it is easy to buy and sell commodity futures.
Diversified Investment Portfolio
Strategic asset allocation is one of the investment portfolio strategies that involve setting target allocations for various asset classes and rebalancing the portfolio period. So, a diversified portfolio is very much needed while investing.
Looking at the historic performance of commodities, the commodities have shown negative or no correlation with the stocks and bonds. So, as long as commodities are not correlated with equities, even a small commodities allocation in an equity-loaded portfolio can reduce the overall volatility and improve risk-adjusted returns. So, we would recommend you to consider investing in raw materials simultaneously. Think of it this way, if there is a stock market crash then you will not end up putting all eggs in one basket. Commodity investments tend to move in opposite direction as regular stocks or bonds investments.
So, by investing in commodities you will be keeping your portfolio steady when the rest of your investments are tanking.
Hedge against Inflation
By investing in commodities, one can have the benefit of inflation hedge. As you know during the period of high inflation, the value of currency depreciates and investors often sell off their stocks and bonds to invest in commodities.
In short, during the times of inflation, the commodity prices tend to pick up when the inflation has been the prices of raw materials also go up. Therefore, having commodities in your portfolio can benefit you against the inflation risks and upswings of the financial markets.
But, don’t forget, on occasions, commodities can be highly volatile in comparison of stocks, bonds, and other types of investments. So, make sure you don’t get caught naked in the inflation environment; you should add some hard assets such as Gold, Silver, or maybe Copper in your portfolio to hedge against the market risks.
In the above point, we mentioned that commodities are highly volatile and considered a very risky investment. The means, there are big swings in the commodity market that either one hit a big profit or hit with a big loss. This high volatility in the commodity market creates big opportunities to get the high returns in the market if you time your investments right. If you do a proper research, pick the right stocks, and time your investments right then you can get high commodity returns maybe the highest in your portfolio.
So, the huge swing in prices can be beneficial for investors who are invested in the commodity market.
Low Margin Trading
The good thing about investing in commodities is you can trade on low margin. Unlike, equity and other asset classes, the commodity trading needed quite a low margin to deposit with the broker. Such low margins (near 5-10% of the total value of the contract) allow you to take the higher positions in a lesser capital.
Hope, this article helped you in a way you expected it to be. To know more about how to invest in commodity market visit and learn about commodity investment with Advisorymandi.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.