Authored by Sunoor Kaul

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The first thing that comes to mind when investors seek money-making opportunities is either equity markets, debt funds, or real estate. Even if people were to invest in commodities, the go-to options are usually expensive and rare metals such as gold, silver, or crude oil, without realizing the scope of other assets like agricultural produce.

Moreover, global and domestic investments center mostly on the returns offered by stocks, bonds, and the plethora of funds.

New investors often get reminded by market experts about the advantage of diversifying one’s investments. Contrary to popular opinion, diversification isn’t just confined to the standard fare portfolios that brokers offer, comprising the above basic set of options.

On pursuing it closely, people will find that there is a range of asset classes that can be considered a part of a diversification strategy. By not putting all the eggs in one basket, people stand to balance out the prospect of a return on investments.

A comparison with other investment opportunities

Markets are confronted with uncertainties daily, and the volatility tends to be severe in the case of large-scale global disruptions such as economic crises, natural disasters, or pandemics.

The COVID-19 crisis is unfolding before our eyes, and we have already witnessed the impact it has had on global trade and commerce. In such scenarios, recommendations direct investors towards commodities as a hedge against catastrophes like the current pandemic.

Whether commodities purchases are in the form of futures contracts, ETFs (exchange-traded funds), or options, it is considered a better investment as compared to the real estate sector.

Commodity investments tend to generate more liquidity, owing to the seasonality and unpredictability in prices. In times of an economic downturn, prices of commodities in the agricultural and energy sector remain buoyant by en-large. The price fluctuation opens a window of opportunity to bring liquidity in crisis times, unlike the reticent real estate sector.

Functions of commodities and ways to invest in them

A significant aspect of commodity investment today is that a whole host of options have been available for institutional investors as well as commoners. They could either invest directly, through commodity futures contracts, or by purchasing shares in companies that facilitate the production of commodities. While commodities are an additional portfolio diversification option after stocks and mutual funds, not many are aware of the lesser-known investment avenues.

Tradable commodities are usually of four kinds, and they are metals, energy, livestock, and agricultural produce. Metals include the likes of gold, silver, copper, etc., while energy commodities are usually different varieties of crude oil, natural gas, or gasoline. Livestock commodities are self-explanatory, but people are unaware as to where they can invest when it comes to agricultural produce. For instance, a wide array of crops often get missed in the larger scheme of market investments. Agri commodities like corn, wheat, rice, coffee, or sugar, do not usually feature in investment portfolios.

On the bright side, the expansion of the internet and technology has disrupted the ecosystem. Consequently, the markets have opened up to more possibilities. With institutional investors’ decision making given a fillip, they can take swift decisions in Agri commodities’ sales and purchases. Moreover, agricultural supply chains received a new lease of life, invigorating liquidity, and value for Agri commodities as an asset class. Further to this, financing commodities could be a more viable alternative for conservative investors, given the volatility of a market during crisis times.

Positive steps and the way forward

Investors deposit margin money with brokerage firms when investing in commodity futures. The good news is that the margin requirements for commodities are way lower as compared to other asset classes. It usually ranges anywhere between 5 percent and 10 percent of the agreement, allowing participation of larger scales, thereby increasing the chance for higher profits.

In addition to the above advantage, the new pass-through certificates (PTCs) offers the safest option to invest in commodities in a more securitized process and backed by receivables. It eases the process of participation for everyone, without the need to acquire knowledge and technical skills to understand the market functions. It holds a lot of promise, and investors must look beyond traditional asset classes to reduce portfolio risks and capitalize on volatile and uncertain markets.

Sunoor Kaul is Co Founder of Origo Commodities. Views are personal