Is Investment in Commodities A Good Option?

Investment in Commodities

In the modern financial world, a wide array of options is available wherein one can invest their extra resources, and expect to gain a good fortune out of it. Among the various financial instruments that are popularly invested and traded, one of the most popular ones is the commodity investment market. Here, we will take a brief look at the various nitty-gritty of this highly lucrative financial instrument and the market it operates in, and try to determine whether an investment in commodities is a good option. So, let’s start. 

Commodities as an investment instrument.

So, before we can understand whether an investment in commodities is a good choice or not, we need to understand what commodities actually mean. So, if you have dabbled in financial markets for some time, you would have a fairly good idea of how it operates. We purchase the stocks of a particular listed company at a particular price and expect the market prices to go up, be it intraday or over a period of time. Assuming that the prices go up, we can sell these off for a profit. 

Now, commodity investment refers to investment in physical commodities, commodity funds, commodity derivatives, etc. Basically, by investing in these, one is buying up raw materials like metals, crude oil, agricultural products, etc. with the hope that the prices of these raw materials will go up, thereby generating a healthy profit. This is the basic concept that goes behind commodities investment or trading.

There are various instruments through which one can venture into this rather lucrative but safe investment region. Let’s take a brief look at some of these instruments. 

  • By purchasing physical goods- You may have seen our forefathers and parents buying gold biscuits, jewelry, and other precious metals on the occasion of Dhanteras. Well, this is one of the most basic forms of commodity investment there is, and one of the most popular ones as well. But there is one major drawback with this method, well, actually two. Firstly, it’s not possible to stock up on each and every raw material there is, like crude oil, agricultural produce, etc. Secondly, trading these isn’t really easy, and there are several channels and methods involved, something that makes the process quite cumbersome. 
  • ETF- These function in a manner that is pretty similar to how other forms of ETFs work and track a wide index for operating. The difference lies in the fact that these ETFs deal solely with the various raw materials like oils, metals, etc. 
  • Futures- If you are a hard-core trader, the commodities futures market would prove to be appealing to you. This high-risk, high-return methodology of commodities investment is quite popular, although not the easiest. One can make a fortune out of these futures contracts, but this is something that requires a considerable amount of knowledge and experience. 

Well, if all these investment jargons are becoming too much to handle, there is something else that you can do to enter the commodities market, and that is through the MCX or Multi Commodity Exchange of India. This is the first commodities exchange that is listed and offers an online trading platform that facilitates commodity derivatives transactions. They are a SEBI registered entity and have really revolutionized the Indian commodity market. One can also purchase the shares of MCX from the BSE and the NSE since MCX is a publicly listed entity. As of 16.08.2022, MCX share price today opened at 1,325 INR and has been delivering consistent returns over a period of time, making it a solid investment option. Now, let us take a look at the various benefits that investment in commodities brings to the table. 

  • Defends against inflation- One of the biggest detriments to long-term wealth creation is the inflation that’s prevailing in our economies. As overall price levels keep rising consistently, fixed return instruments like FDs become irrelevant since they seldom offer a return that’s greater than the inflation. This is where something like commodities exchange shines through, since they consistently deliver a return that’s more than the prevailing inflation rates, thereby enabling long-term wealth creation. 
  • Extremely low correlation to other asset classes- If you are someone who has studied the financial markets for some time now, there is one thing that you must’ve realized, and that is the fact that various assets move in a close correlation with each other. As bond yields go up, that negatively affects the equity markets and likewise. Well, commodities do not show this herd behaviour, thereby making them a safer bet overall. 
  • Diversification- One of the best advantages that commodities investment can bring to the table is the diversification that they can offer. In investment, putting all your eggs in the same basket is something that shall never be done, and investment in commodities helps avoid that greatly. 

Final take:

Investments in commodities are a great choice for anyone who is looking up generate a good long-term fortune. MCX is a really good avenue that one can take to get started in this genre of investment, and it would be a good idea to check on the MCX share price today before purchasing the stocks. These would certainly be a great addition to any portfolio there is.