Investors..Welcome to Commodity Trading. Presented byS. Arunagirinathan.
Investing in commodity market Commodities are an excellent investment option as it can add a great deal of diversification to your portfolio TAGS: diversified investment portfolio, excellent investment option, high price volatility, non-agri products, practical knowledge Investing in commodity marketA person having no knowledge about commodity market and the onewho doesn’t know how to invest in it, then he can probably look forthat information about commodity investments from the Internet andfollow some online Tips. But this is not enough, as having practicalknowledge of how to go about investing is also very important. So, let’sunderstand how we can invest in commodity markets and what are itsbenefits and drawbacks.
How to invest in commodity markets? The commodity markets are markets where the raw products areexchanged. It is a market where we can trade in both the NCDEX and MCXmarkets. MCX includes the gold, zinc, copper, lead, nickel, rubber and crude oiland the NCDEX market includes agri and non- agri products. The commoditiesare traded on exchanges where the buyers and sellers can work together to getthe products they need or make profit from the fluctuating prices. Commoditytrading is buying and selling of futures and futures options.Key benefits of investing in commodity marketsLess risk: If you choose to invest in commodity then as an investor yourchances of risks are less. Thus, profits from commodity investing will behelpful for you to balance other losses on account of other losses due to otherfinancial instruments in your portfolio. There are chances of less risk ascommodity investing deals with diverse items.Main component of diversified investment portfolio: The commodities aregenerally viewed as the main part of the diversified investment portfolio.Economic growth of the emerging countries: The economic growth ofemerging countries like India, Brazil and China and the demand for rawmaterials rise significantly. The growing economies need raw materials to boostthe pace of the industry and also make products. So, stronger the economygrows, the greater the demand for commodities.
How commodity trading can make you rich For a lot of people, trading in commodities is as good as trading in thestock markets. It has the same amount of uncertainties and risks associated with it. Youcan also make the same amount of profit, if not more, from it. Knowing the basics of commodity trading, however, is essential beforeyou dabble in its nitty-gritty.What is commodity trading? Commodity markets are markets where physical raw or primaryproducts such as gold, agricultural products, precious and base metals, energycommodities, etc, are exchanged. These raw commodities are traded on regulated commoditiesexchanges such as National Commodity and Derivatives Exchange Limited andMulti Commodity Exchange of India, in which they are bought and sold instandardized contracts.
Why should you opt for commodity trading? The commodity market is a promising avenue for your investment. Itoffers huge opportunities and enables you to diversify your portfolio. With theleast margin requirement being as low as Rs 5,000, it is suited for smallinvestments also. It also enables you to have more control over the costs associated withtrading. For example, if you have traded in gold as a long terminvestment, there might have been times when you would have been worriedabout the protection, transportation and purity of the gold you are investing in. With commodity trading, you can deal in gold futures where, just likestock futures, you do not have to actually buy the gold and keep it somewhere.Instead, by buying gold futures, you can eliminate the need to worry aboutthese things and concentrate on maximizing your profits. The potential for attractive returns is probably the most obvious reasonto go in for commodity trading, but it isnt the only factor. Commodities also offer investors other significant benefits, includingenhanced portfolio diversification and a hedge against inflation and event risk.
What are commodity futures? Commodities can be traded on either spot markets, or in the form offutures. Spot markets are those in which the commodity is traded immediatelyin exchange for cash or some other goods. Futures are standardized contracts among buyers and sellers ofcommodities that specify the amount of a commodity, grade/quality anddelivery location. Commodity trading with futures contracts takes place at a futuresexchange and, like the stock market, is entirely anonymous.
How does the trading work? Commodity trading works exactly like stock futures. When you buy afutures, you dont have to pay the entire amount, just a fixed percentage of thecost. This is known as the margin. For example: You decide to buy 100gms of gold futures (which is theminimum contract size) for a certain price. You have to pay a certain amount ofmargin set by the commodity trading exchange you are trading on, which wouldbe a lower amount than the original price for 100 gms. The next day, the price goes up by Rs. 1000. Rs. 1000 would becredited into your account. The following day, it dips by Rs. 500. Rs. 500 isdebited from your account. Once you feel that the amount that you have already profited with isnot going to change, you can choose to sell the futures. This is simplest way toexplain commodity futures trading.
What are the dos and donts of commodity trading?
Why the time is not ripe to buy a home That the property market has undergone a significant correction is wellknown. That real estate experts are now talking about prices bottoming out iswell known too. But, contrary to conventional wisdom, experts are of the view that thismay not be the right time to invest in residential property. And, their advice isfor both first and second-time home buyers. Consider this: A report from PropEquity, a firm that maintains data onreal estate, said that in the first quarter of the current financial year, the Mumbaimarket saw an average correction of 42.84 per cent compared to thecorresponding quarter last year.
Time not ripe for buying a home According to another report by Centrum Broking on MaharashtraChamber of Housing Industrys exhibition, prominent developers such asKalpataru, Lodha, Rustomjee and the Acme Group were quoting prices 20 percent lower than their card rate six months ago. Godrej Properties had droppedthe quoted price of its Mahalaxmi project (Planet Godrej) by 34 per cent. Prices in other major metros too have seen a significant correction inthe past six months, according to the PropEquity report. These include Gurgaon(24 per cent correction), Chennai (13 per cent) and Hyderabad (10 per cent) forthe same time period. Then comes the taxation part. If the house is let out, then the rentincome is taxable. It is combined with the persons salary and charged as per thetax bracket. The income tax department also charges wealth tax of 1 per cent on aresidential house unless it is let out for 300 days in a year. This is applicable onthe value of the house exceeding Rs 15 lakh (Rs 1.5 million). If the propertyvalue is, say, Rs 25 lakh (Rs 2.5 million), the wealth tax will be levied on Rs 10lakh (Rs 1 million).
Also, if the person does not let out the property, the IT department takesa notional value of the rent that the property can fetch and taxes the owneraccordingly. If you buy it in the name of your family member, you will lose out onthe tax deduction. "For a second house, a person can claim the entire interest asa deduction. In case of co-applicant, the deductions are in the same proportionas the funds deployed by each person," says Kanu Doshi, a tax expert. "A house for investment purpose will also skew the portfolio," saysGaurav Mashruwala, a certified financial planner. A major chunk of the portfolio will be real estate. This asset class isilliquid. If there is an emergency in the future, the entire house will need to besold. A person can sell other investments in parts. The same is true when theperson reaches closer to his goals for which he has been saving. One can look at property only if they have excess cash and the propertyvalue is only a minor part of the investment portfolio, say investment experts. But if you still not convinced and want to go ahead with the purchase,wait for another six months. "There will be some clarity on the economy aswell as the real estate industry in this period," says Vakil.
All about the New Pension Scheme From May 1, Indians have access to another investment avenue to planfor retirement in the New Pension Scheme (NPS). The scheme has been in the pipeline for at least five years but it finallytook shape in 2007-08. Although the government was pushing for the schemeafter a law providing statutory backing to the regulator was enacted, the Leftparties, which were supporting the United Progressive Alliance government,did not allow the passage of the Bill. So, last year, the government decided to go ahead by allowing the NPSTrust to enter management agreements with fund managers. What benefits doesthe NPS offer? Who is eligible? Business Standard provides a ready-reckoner.
Who can join the New Pension Scheme? Any Indian citizen between 18 and 55 years. At present, only tier-I ofthe scheme, involving a contribution to a non-withdrawable account, is open. Subsequently tier-II accounts, which permit voluntary savings that canbe withdrawn at any point of time, can be opened. But to be eligible to open atier-II account, you need a tier-I account.How do I enrol? You will need to visit a point of presence (PoP), fill up the prescribedform with the required documents. Once you are registered, the Central Recordkeeping Agency (CRA)will send you a Permanent Retirement Account Number (PRAN), along withtelephone and internet passwords.
How much can I invest? There is no investment ceiling. But the minimum investment limit hasbeen fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required tocontribute at least once a quarter but there is no ceiling on how many times youinvest during the year.What is the penalty for failure to make the minimum payment? You will have to bear a penalty of Rs 100 per year of default and willneed to pay it with the minimum amount to reactivate the account. Also,dormant accounts will be closed when the account value falls to zero.Are my investments guaranteed? No. There is no guarantee since NPS is a defined contribution schemeand the benefits depend on the amount contributed and the investment growthup to the time of exit.
How should I select my investment option? You can choose the investment mix between equity or E (high risk buthigh returns), mainly fixed income instruments or C (that come with mediumrisk and returns) and pure fixed investment products or G (which offer lowreturns but have very low risks associated with them). Equity investment iscapped at 50 per cent. At present, the equity investment consists of index funds that replicatethe Sensex or Nifty portfolio. The C segment includes liquid funds, corporatedebt instruments, fixed deposits and public sector, municipal and infrastructurebonds. The pure fixed investment instruments include state and centralgovernment securities. There is a trade-off between risk and returns, with a younger investorplaced better to take risks. If you are unable to decide the investment mix, the default option willkick in.
What is the default option? The default option, called auto choice lifecycle fund, will see theinvestment mix change according to the age of the subscriber. At the lowestentry age of 18 years, auto choice entails an investment of 50 per cent in E, 30per cent in C and 20 per cent in G. The ratios will remain unchanged till the subscriber turns 36, when theratio of investment in E and C will decrease annually, while the proportion of Grises. By the time the subscriber is 55 years, G will account for 80 per cent ofthe corpus, while the share of E and C will fall to 10 per cent each.Who will decide the fund manager? At the moment, the Pension Fund Regulatory and Development Authority(PFRDA) has selected six fund managers -- State Bank of India, UTI, ICICIPrudential, Kotak Mahindra, IDFC and Reliance -- on the basis of a bidding andtechnical evaluation process. You have to select one fund manager at the time of deciding your investmentoption; later, PFRDA may allow subscribers to choose more than one fund manager.
Can I change my investment mix and the fund manager?You can shift from one fund manager to another from May 2010.What happens if I relocate to another city? The PRAN remains the same and you can access a toll-free number (1-800-222080). The details of your PRAN and the statement of transactions willbe available on the CRA website (www.npscra.nsdl.co.in).How can I exit the scheme? The normal retirement age has been fixed at 60 years. At 60, you willbe required to use at least 40 per cent of your accumulated savings to buy a lifeannuity from an insurance company. A phased withdrawal is also allowed butthe lump sum benefit has to be availed of before you turn 70 years. For those looking to exit before turning 60, there is an option towithdraw 20 per cent of the accumulated savings but buy an annuity with theremaining 80 per cent..
If the subscriber dies before he or she turns 60, the nominee can receivethe entire pension corpus. Alternatively, a subscriber can exit if the accountvalue falls to zero or if the citizenship status changes. The age of exit will be reviewed by PFRDA from time to time. Therewill also be the option to select an annuity that will pay a survivor pension toyour spouse.Are there tax benefits for NPS? At present, the investment is covered under section 80CCD of theIncome Tax Act and a tax will be levied if you withdraw the money. You can avoid paying tax by transferring the entire corpus to theannuity service provider. PFRDA has, however, approached the government totreat investment in NPS on a par with instruments like Employees ProvidentFund and Public Provident Fund, for which no tax is levied at theinvestment, accumulation or withdrawal stage.
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