Have you begun share market trading in India to build long-term wealth? Well, there are a lot of options for trading. You can trade stocks, derivatives, commodities, currencies, and other securities to increase returns. Investing in only a single type of financial security is not the ideal choice. As per investment experts, portfolio diversification is crucial for risk management and return maximisation.
When you rely on different investment vehicles, the probability of profits is high. However, it is essential to understand the working of different financial securities available on stock exchanges.
Let us discuss the importance of commodities for portfolio diversification in India.
Understanding the Basics of Commodities in India
Before making any decision, it is crucial to understand commodity trading basics in India. Commodities are goods or raw materials that can be bought or sold on stock exchanges. The goods can be oil, wheat, gold, silver, soybean, zinc, copper, aluminium, or nickel. Commodities available on stock exchanges are divided into two major categories, soft and hard commodities. Soft commodities are raw materials grown or belonging to the agricultural sector. Cattle, soybean, corn, and wheat are examples of soft commodities. On the other hand, hard commodities are either extracted, drilled, or mined. Gold, nickel, zinc, and aluminium are some examples of hard commodities in India.
When you buy shares or stocks in India, they get transferred to your Demat account in digital format. The same cannot be said for commodities available on stock exchanges. When you buy commodities, they do not get transferred to your Demat account in digital format. When you buy commodities, you are investing in contracts, also known as futures contracts. These contracts include the commodity type, quantity, quality, delivery date, price, and delivery location. You agree to buy or sell the commodities at a pre-decided price via the contract. At the end of the contract, the commodities will be transferred to your physical location if you decide to acquire them.
How do Commodities Help with Portfolio Diversification in India?
Commodity trading is crucial for portfolio diversification for many reasons. The first reason is the negative correlation of commodities with stocks, bonds, and other financial securities. When two securities have a positive correlation, their prices go up simultaneously. On the other hand, there is no relation in prices when the correlation between two securities is zero. However, prices are inversely proportional when a negative correlation exists between two financial securities. It means the prices of commodities are likely to rise when the bonds and stocks lose their value. Even if the stock and bond market plummets, you can earn high returns by investing in commodities.
The main aim of portfolio diversification is to minimise risks and earn returns even during market disruptions. By investing in commodities, you can shield yourself from inflation. When inflation rises, the price of commodities also rises in the market. When other people worry about rising prices, you will enjoy higher returns by investing in commodities. Another benefit of commodity trading is exposure to a vast market, sometimes on a global level. The same cannot be said about stocks and bonds available on stock exchanges. Let us say you have invested in crude oil via your trading account. Since crude oil has a global market, you will have exposure to the worldwide energy industry.
Understanding the commodity trading basics is not enough. You need a demat account to start investing in commodities. Religare Broking can help you open both accounts for free and invest in different financial securities. You can check the price of commodities and buy affordable futures contracts. Besides diversifying your portfolio with commodity investment, you will shield yourself from market disruptions.
In a Nutshell
You aren’t bound to only invest in stocks and shares in India. You can try investing in commodities to diversify the portfolio and earn higher returns. The price of commodities has an inverse relationship with the value of other financial securities, thus helping you to minimise risks. So start investing in commodities right away!