While a majority of investors invest in stock market, there are many who have ignoredraw materials. Materials definitely offer investors a safer edge during the time of inflation. Commodities like gold and silver provide many benefits to investors during economic uncertainties. However, investment in commodities is considered a risky mode of investment. This does not imply that you shouldn’t be including commodities investment in your portfolio.
Investing in commodities future obviously requires you to have someknowledge and familiarity about the commodities market.Commodity Investmentsare widely considered as a hedge against inflation. This implies that commodities be held for the longer term.
Benefits of Investing in Commodities
A Safe Refuge during Crisis
Often investors do not feel confident about investing in commodities but think about precious metals like silver, gold, and platinum; they offer a clear protection during inflation and times of economic uncertainty. They are a good source of investment even during tough times.
Diversified Investment Portfolio
An ideal asset allocation plan means having a diversified portfolio. Commodities are animportant component of having a diversified investment portfolio. If you are already investing in stocks and bonds, it is suggested that you consider investing in raw materials simultaneously.This way, whenever there is a stock market crash, you are not puttingall your eggs in a single basket.
Often, the values of commodities see a downfall justlike stock market shares. They react differently in various geo-political and economic scenarios. Diversification, thus, is more likely to improve risk-adjusted returns and reduce volatility.
Transparency in the Process
Trading in commodity futures is a transparent process.Thecourse of action leads you to fair price discovery which is controlledby large-scale participation. Such a huge participation also reflects different perspectives and outlook of a wider section of people who are dealing with that commodity.
Commodities are riskier form of investments with huge swings in prices.Companies either hit it right on a resource discovery or experienceheavy losses. This opens up opportunities for you to make profits in the commodity market provided you plan your investments right.
Whenever the rupee becomes less valuable, you need more money to buy commodity goods from different parts of the world. Especially during inflation, the prices of commodity goods go up as other investors sell off their stocks and bonds to invest incommodities. Therefore, you can be benefit from some commodities in your portfolio that act as a potential hedge against risks.
Protection against Inflation
When the economy is dipping, money is worth less – inflation occurs. The prices for commodities usually go up during high inflation;accordingly the price of raw materials also sees an upward trend.Therefore, a few commodities in your portfolio will help you benefit from this upswing.
Trading on Lower Margin
As a trader, youneed to deposit a margin with your broker which can be close to 5 to 10% of the totalvalue of contract, which is much lower considering other asset classes. Such a low margin allows you to take larger positions at a lesser capital.
To know more on how to invest in commodity market and to learn basics of commodity market visit here Learn the basics of commodity market with Kotak Commodities