Recently, the price of crude oil went negative due to very low oil demand because of coronavirus. This very low price of crude oil aroused interest in many traders and investors to invest in crude oil. Not only just crude almost every commodity be it natural gas, copper, aluminium, etc are also trading at very low prices.
In this post we will discuss 3 ways to invest in commodities in India.
#1. Buy directly from MCX
All you need is a commodity trading account, which almost every broker offers. Once you have activated the commodity trading account you can directly buy crude oil and also other commodities as well through your broker.
The drawback here is that commodities are traded in derivative form, which means you can trade in them through futures and options contract, which have an expiry date. So this is more of a trading product and not an investment product as you can’t hold it for long without rollover.
Just recently, since US Oil futures traded negative on the day of expiry, India’s Oil futures closed negative as well on the day of expiry, and traders who did not book losses manually, made a loss of over INR 4.5 Lakhs per lot.
So, think very carefully if you want to trade in commodities via this route.
#2. Buy the stocks of companies producing commodities
When the price of any commodity drops, the share price of the company producing that commodity drops simultaneously. So, if you are keen on investing in the commodities, instead of directly buying the commodity you can buy shares of associated companies dealing in that commodity.
For example, if you are interested in crude oil, you can invest in companies like ONGC, Oil India which are producers of crude oil. If you are interested in copper or zinc, you have the option of Hindustan Copper and Hindustan Zinc like companies. If you have an interest in aluminum, you can buy Hindalco. If you have an interest in Iron, which is the main component in making steel, you have NMDC.
Likewise, you can check the listed company dealing in a particular commodity and invest in them directly.
#3. Commodity Mutual Fund
If you do not invest in equities directly or do not want to put your capital in high-risk money markets (equities), you can always go the Mutual Funds way.
There are some sectoral mutual funds such as the natural resources funds. These funds invest in companies dealing with the production or distribution of commodities. When the majority of the commodities are trading at lower prices this can be a better option.
As we can’t buy every commodity company but can easily buy a commodity mutual fund. One such fund is DSP Blackrock New Energy and natural resources fund. Below is the portfolio of this fund, you can see the fund has invested in various commodities-related companies.
So you see, these are the 3 ways by which you can invest in commodities if you feel the commodity prices are significantly down, just like now due to COVID-19.
If you are unable to determine which investment route you should follow, let me help you a bit but after all, it is going to be your choice alone.
Commodities via MCX: As mentioned before, these trade in futures and options, meaning there will be a minimum of 100-1000 pieces per lot that you will have to buy, and they become a part of extremely high-risk trading. Only if you can bear a significant amount of losses, you should opt for this route. Since it a very high-risk tool, it also gives you a very high return on capital.
Commodities via Equity: This is a relatively less risky way to invest in commodities. If you can identify a good quality company in your preferred choice of commodity and enter at the right price, the risk-reward ratio can work in your favour and create wealth for you. Our personal favourite company in commodities in NMDC, Reliance, Hindustan Zinc, and a few more.
Commodities via Mutual Funds: This is the low-risk low reward way to invest in commodities. Mutual Funds that have a portfolio of commodity companies and are well-diversified offer a safe investment option. This is for those who want to play it safe while having patience for their capital to grow over 3-10 years.
Over to You
Choose the type of risk you are willing to take and get in this sector since all the commodity prices are trading quite low. If you want to invest in Mutual Funds, I recommend Angel Bee, a cool app for mutual fund investing.
If you have any questions regarding the same, do let us know in the comments below, we answer each and every query! If you want to learn about anything else, we are open to hearing your suggestions.
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 2010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.