that the Indian market has witnessed over the past year, with the AUMs of equity funds and ETFs falling by 0.62% in September this year. It's to deal with such uncertainties that investors are looking for alternative investment options, such as commodities, which are currently witnessing a rally. In fact, the AUM for gold ETFs increased by 7.9% in September. Does this mean that portfolio management services (PMS) for commodities have become inevitable? Shobhana Chadha spoke to financial experts and found they are unanimous on the need for portfolio diversification through commodities and introduction of advisory services. However, they differ on whether small investors should make use of the service.
Naveen Mathur Associate Director, Commodities, Angel Broking Yes, but...
Portfolio management services should be allowed only for those commodities whose prices are driven solely by the international markets. This will help avert the risk of prices being driven by large market players. In India, the prices of globally traded commodities, such as bullion, base metals and energy, mirror the international market prices and are not driven by the Indian demand-supply fundamentals. Hence, PMS in these commodities will not be risky. However, the reverse may happen in the case of commodities that derive their prices from domestic fundamentals. For instance, PMS in agricultural commodities may cause an upheaval. Inflation in agricultural commodities is a sensitive issue and, hence, the related segments involve massive government intervention. The fear of PMS funds driving the prices of essential commodities will increase such interference, which will significantly diminish the pragmatism of PMS in the segment.
Overall, PMS in commodities will help investors in the Indian market to diversify their portfolios judiciously and make the best of commodity investment. Commodities offer excellent returns, especially in times of high inflation and market uncertainty. As a result, they help the investors mitigate the impact of negative real returns or losses from other asset classes in their portfolios. The Indian investor is finally becoming mature as he has started regarding commodities as a potential investment option. The introduction of smaller contract sizes has helped even the small, savvy investors to benefit from trading in commodities. Convincing investors has not been difficult as they realise that diversification is the need of the hour.
If PMS in commodities is started, it is likely to be targeted towards investors who have not yet ventured in this segment and regard the futures market as a new concept. Small investors will surely benefit as they won't be involved in the day-to-day monitoring of the portfolio. Since it is difficult for them to read and research the complex commodities market, they can benefit from the expertise of an experienced manager handling their portfolio. The service will ensure that they derive the benefits of investing in commodities without the hassle of understanding the nitty-gritty of trading. There is also a likelihood of the PMS reducing volatility in the commodity market.
Portfolio management services should be allowed only for those commodities whose prices are driven solely by the international markets. This will help avert the risk of prices being driven by large market players. In India, the prices of globally traded commodities, such as bullion, base metals and energy, mirror the international market prices and are not driven by the Indian demand-supply fundamentals. Hence, PMS in these commodities will not be risky. However, the reverse may happen in the case of commodities that derive their prices from domestic fundamentals. For instance, PMS in agricultural commodities may cause an upheaval. Inflation in agricultural commodities is a sensitive issue and, hence, the related segments involve massive government intervention. The fear of PMS funds driving the prices of essential commodities will increase such interference, which will significantly diminish the pragmatism of PMS in the segment.
Overall, PMS in commodities will help investors in the Indian market to diversify their portfolios judiciously and make the best of commodity investment. Commodities offer excellent returns, especially in times of high inflation and market uncertainty. As a result, they help the investors mitigate the impact of negative real returns or losses from other asset classes in their portfolios. The Indian investor is finally becoming mature as he has started regarding commodities as a potential investment option. The introduction of smaller contract sizes has helped even the small, savvy investors to benefit from trading in commodities. Convincing investors has not been difficult as they realise that diversification is the need of the hour.
If PMS in commodities is started, it is likely to be targeted towards investors who have not yet ventured in this segment and regard the futures market as a new concept. Small investors will surely benefit as they won't be involved in the day-to-day monitoring of the portfolio. Since it is difficult for them to read and research the complex commodities market, they can benefit from the expertise of an experienced manager handling their portfolio. The service will ensure that they derive the benefits of investing in commodities without the hassle of understanding the nitty-gritty of trading. There is also a likelihood of the PMS reducing volatility in the commodity market.
Naresh Pachisia
Managing Director, SKP Securities
Yes, but...
PMS for commodities should not have exposure to the futures market. The objective of such a service is to help investors meet certain financial objectives, and this may not be possible if they deploy funds in trading instruments like commodity futures. Though portfolio advisory services in commodities were allowed earlier, these were banned by the commodity markets regulator, Forward Markets Commission (FMC), in 2007. There was lack of awareness about commodity futures when trading was introduced, and as a result, investor participation was low. This resulted in low income for brokerage houses, some of which started packaging commodity futures trading as PMS to give a push to their own revenues. The move made the futures trading come across as more comprehensible to investors, since they were being given the impression that their commodity portfolios were managed by experts who understood the fundamentals of the asset class. Brokerage houses assumed discretionary powers from investors to take positions based completely on technical analysis. In short, there was an attempt to position actual trading as investing in people's minds. This was naturally imprudent and the FMC did a good job by banning it.
There is no doubt that commodities, especially those like precious and base metals and crude oil, can be a useful asset class for investors. They can exploit these as useful investment options since their prices are impacted by macro-economic factors. However, PMS for commodities should include investment products, such as demat holding and exchange traded funds (ETFs). The commodities market in India is in still evolving. Over time, spot market trading will gain popularity and ETFs in other commodities will be introduced. The commodity exchanges will also come out with more innovative investment products. While all this may take some time, this is what PMS for commodities should ideally constitute.
Commodities is a relatively risky asset class and it may not be advisable for small investors to put their money in these. They have the option of better asset classes to deploy the limited amount of investible funds to meet their financial goals. Ideally, they should only put in additional funds for investment in commodities.
Managing Director, SKP Securities
Yes, but...
PMS for commodities should not have exposure to the futures market. The objective of such a service is to help investors meet certain financial objectives, and this may not be possible if they deploy funds in trading instruments like commodity futures. Though portfolio advisory services in commodities were allowed earlier, these were banned by the commodity markets regulator, Forward Markets Commission (FMC), in 2007. There was lack of awareness about commodity futures when trading was introduced, and as a result, investor participation was low. This resulted in low income for brokerage houses, some of which started packaging commodity futures trading as PMS to give a push to their own revenues. The move made the futures trading come across as more comprehensible to investors, since they were being given the impression that their commodity portfolios were managed by experts who understood the fundamentals of the asset class. Brokerage houses assumed discretionary powers from investors to take positions based completely on technical analysis. In short, there was an attempt to position actual trading as investing in people's minds. This was naturally imprudent and the FMC did a good job by banning it.
There is no doubt that commodities, especially those like precious and base metals and crude oil, can be a useful asset class for investors. They can exploit these as useful investment options since their prices are impacted by macro-economic factors. However, PMS for commodities should include investment products, such as demat holding and exchange traded funds (ETFs). The commodities market in India is in still evolving. Over time, spot market trading will gain popularity and ETFs in other commodities will be introduced. The commodity exchanges will also come out with more innovative investment products. While all this may take some time, this is what PMS for commodities should ideally constitute.
Commodities is a relatively risky asset class and it may not be advisable for small investors to put their money in these. They have the option of better asset classes to deploy the limited amount of investible funds to meet their financial goals. Ideally, they should only put in additional funds for investment in commodities.
Dharmesh Bhatia
Associate Vice-President, Research, Kotak Commodities
Yes
All globally traded commodities should be included in PMS for commodities. Even agricultural commodities, such as gram, soybean and other edible oils and pulses, should be included in the ambit of these advisory services. Separately, these should include all avenues of the commodities market—spot (physical), futures and options. Presently, options trading in commodities is not allowed in the country. However, once the Forward Contracts (Regulation) Amendment (FCRA) bill is approved, options trading could well be permitted. The FCRA Bill is currently awaiting the nod of the parliamentary standing committee. The bill seeks to empower the commodity markets regulator and allow several new commodity-related instruments. If all market avenues are allowed in the PMS for commodities,investment strategies can be implemented and even structured products can be introduced to cater to the needs of all types of investors. Portfolio managers can take positions in spot markets for the clients who want to be long-term investors. The aggressive investors, who are comfortable with the concept of speculating, can be made to take bets in the futures market. They can even hedge their risks through options. Restricting PMS to only a few parts of the market will reduce the scope of investment in commodities to primarily traditional items, such as gold and silver. Hence, the main purpose of including commodities in the portfolio—diversification—will not be achieved in a wholesome manner. Demat holdings and long-term bets are not possible in the case of agricultural commodities as they are perishable by nature. If investors want to include such commodities in their portfolios, they will have to take carefully analysed positions in the futures market, and this means that will need the support of portfolio advisers.
Even mutual funds and banks must be allowed to offer PMS as the commodities market is very small in India and needs more depth and liquidity for appropriate price discovery. The phenomenon is in direct contrast to that in the global markets, where the trading volume in commodities is at least four times the level of trading in stocks. Once more liquidity sets in, even small investors will be able to consider the commodity space as an investment option. In fact, they can do so even now, at least for the commodities whose prices are more trend-driven, such as base metals and edible oil complex, which includes castor oil, groundnut, sunflower seed and others.
Associate Vice-President, Research, Kotak Commodities
Yes
All globally traded commodities should be included in PMS for commodities. Even agricultural commodities, such as gram, soybean and other edible oils and pulses, should be included in the ambit of these advisory services. Separately, these should include all avenues of the commodities market—spot (physical), futures and options. Presently, options trading in commodities is not allowed in the country. However, once the Forward Contracts (Regulation) Amendment (FCRA) bill is approved, options trading could well be permitted. The FCRA Bill is currently awaiting the nod of the parliamentary standing committee. The bill seeks to empower the commodity markets regulator and allow several new commodity-related instruments. If all market avenues are allowed in the PMS for commodities,investment strategies can be implemented and even structured products can be introduced to cater to the needs of all types of investors. Portfolio managers can take positions in spot markets for the clients who want to be long-term investors. The aggressive investors, who are comfortable with the concept of speculating, can be made to take bets in the futures market. They can even hedge their risks through options. Restricting PMS to only a few parts of the market will reduce the scope of investment in commodities to primarily traditional items, such as gold and silver. Hence, the main purpose of including commodities in the portfolio—diversification—will not be achieved in a wholesome manner. Demat holdings and long-term bets are not possible in the case of agricultural commodities as they are perishable by nature. If investors want to include such commodities in their portfolios, they will have to take carefully analysed positions in the futures market, and this means that will need the support of portfolio advisers.
Even mutual funds and banks must be allowed to offer PMS as the commodities market is very small in India and needs more depth and liquidity for appropriate price discovery. The phenomenon is in direct contrast to that in the global markets, where the trading volume in commodities is at least four times the level of trading in stocks. Once more liquidity sets in, even small investors will be able to consider the commodity space as an investment option. In fact, they can do so even now, at least for the commodities whose prices are more trend-driven, such as base metals and edible oil complex, which includes castor oil, groundnut, sunflower seed and others.
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