THE CASE FOR COMMODITIES

Commodities offer great potential to become a separate asset class for savvy investors and should be considered if you are an experienced equity investor looking for a hedging tool

- Narayan Krishnamurthy

Mention commodity investing and chances are one would think of it as risky and complicated. However, unlike stock investing wherein a lot goes into researching on companies, sectors and financials, commodity investing is mostly based on demand and supply concerns. Retail investors with a well-diversified portfolio and stomach for risk can consider commodity investing as a hedging tool. From a portfolio point of view, historically, commodity pricing has been less volatile compared to equity and bonds, providing an efficient portfolio diversification option.

In simple terms, a commodity is an essential good used in trade and may be exchanged for other items. Items like cereals, gold, oil and natural gas are classic examples of commodities (see The Commodities Universe). Commodities can be a significant way for investors to diversify their portfolios outside standard investments. One can have physical trading in these goods, but mostly it happens through futures contracts, where you agree to buy or sell a commodity for a certain price at a specified date.