Commodities Compare

Additional Useful Information

• Commodities Investing in India is suitable for speculators, hedgers and investors who want exposure to the commodity market.

• Hedgers are market participants who are either commercial producers, processors, or end-users of a commodity who have a real business interest in the underlying commodity. Hedging allows market participants to mitigate the risk of price fluctuations in the underlying commodity by locking in a price for future delivery. For example, farmers who grow wheat may use futures contracts to lock in a price for their crop at a future date, thereby reducing the risk of price fluctuations that could affect their profitability.

• Speculators are market participants who buy and sell commodity futures or options contracts with the aim of profiting from price fluctuations. Unlike hedgers, who have a real business interest in the underlying commodity, speculators do not have a direct interest in the physical commodity but are motivated by the potential for profit.

• Alternative Investments in India are typically complex investments and cannot be directly invested in.

Returns *

• Commodities have relatively lower returns as compared to other investment options such as debt and equity.

• Commodity investments can generate returns for investors in one form –
• Business Income – the income earned from the transaction on actual buying and selling of assets is classified as business income. These incomes arise from trading in futures and options, commodity trading, etc.

• Overall, the returns on commodities can vary depending on the performance of the underlying asset and market conditions.

Risk Level

• Commodity investments are high risk investments.

• Since commodity investing is done through futures contracts, leverage is used. This can magnify losses or gains which makes commodity investments high risk investments.

• Another risk is counterparty risk. This is when the party taking the opposite position fails to honor the terms of the contract. This is where the clearinghouse comes into play. A clearinghouse makes sure that the counterparty obligates their contract by making them deposit collateral, etc. However, a clearinghouse is available only on organized exchanges (NSE, BSE). If an investor trades in the unorganized, ‘over the counter’ market, there is no clearinghouse available so, that is an additional risk.

• It is always worth doing thorough due diligence on an individual level on every commodity under consideration.

Liquidity

• Commodity trading/investing is very liquid.

• This is because commodity trading involves derivatives which have an expiry date. This means that no investors will be forced to hold on to the investment for an indefinite period. Investors can either sell the investment or wait till the expiry date, when the settlement will take place.

Interesting Facts

• Investors who find derivatives too risky, take exposure to commodities via investing in the equity of commodity companies. This is another way investors can invest in the commodity market. However, this is a more indirect way of investing in commodities.Commodity ETFs can also be used to gain exposure to commodities.

• Commodity manufacturing companies often hedge commodity prices using commodity derivatives (futures) to safeguard their position from future unexpected price fluctuations.

• Commodities in general do not have a high correlation with equity and debt investments. This is why exposure to commodities results in good diversification benefits.

• There are various commodity markets in India such as Multi Commodity Exchange of India Limited (MCX), National Commodity & Derivatives Exchange Limited (NCDEX), Indian Commodity Exchange (ICEX), National Multi Commodity Exchange (NMCE), etc. Every exchange allows specific commodities to be traded.

Tax Implications

• The taxation of commodity trading in India depends on the type of commodity, the exchange, and the nature of the transaction.

• Profits earned from commodity trading are treated as business income. The tax rate is based on the slab rate applicable to the individual's total income.

• The government of India levies a Commodity Transaction Tax on certain commodity futures contracts traded on recognized commodity exchanges. The tax rate is currently 0.01% of the transaction value. This is in addition to Goods and Services Tax (GST) and Securities Transaction Tax (STT).

Where To Invest

• Commodity Trading: Online Trading in Commodities Market in India - Motilal Oswal

• Commodity Trading - Invest in Commodities Gold, Silver, Crude Oil Today - Upstox