Worldwide, when they speak of millionaires who "made their fortune in oil", say, they don't always mean people who went desert drilling. They could well mean people who traded in the stuff, never once getting their hands gooey. A century ago, India wasn't much of a laggard in trading commodities such as cotton. In fact, the history of commodity trading dates back to 1875, when the 'futures' market kicked off, enabling producers of commodities to sell their produce in advance to gain a safeguard against a price fall, while enabling traders to buy material in advance to guard against a price increase. It was in the mid-1960s that the Indian government banned commodity trading. But it was only last year that the government reversed restrictions on future trading in commodities, thus opening up new investment avenues.

The Mechanisms

The Forward Markets Commission (FMC), the field's apex regulator, allows trading in commodities through four national exchanges across the country: Multi-commodity exchange (MCX), National Commodities and Derivatives Exchange (NCDEX), National Commodities and Metals Exchange (NCME) and National Board of Trade (NBOT). In all, India's commodity futures market, including agricultural products, bullion and metals, is already worth a good Rs 36,000 crore.

A typical future contract is an agreement to buy a certain quantity of a commodity at a particular time in the future for a particular price. These contracts are traded on the abovementioned exchanges (which guarantee that deals will be honoured). "On one hand it's a great hedging platform for growers, and on the other, it's a unique investment avenue for individuals as well as institutional investors who are looking for realistic returns of more than the small savings instruments at a relatively moderate risk," says Jignesh Shah, Managing Director, MCX, the first exchange to start operations, trading in 10 commodities and with 150 active members helping notch up a daily average turnover of Rs 200 crore.

Likewise, NCDEX, which started operations three months back with 10 commodities, has 200 active members and generates Rs 100 crore daily. "The commodities markets are driven by the economic fundamentals," says Madan Sabnavis, Chief Economist and Head, Knowledge Management, NCDEX, "The prices are dependent on the demand or supply-and the monsoon-for the particular commodity. There are good returns to be made by investors, as fluctuations in the commodity markets are nowhere close to the aberrations that equity markets witness."

The third exchange, NCME, which is promoted by Central Warehousing Corporation, some agricultural institutions and Punjab National Bank, generates a daily turnover of around Rs 160 crore, though it has some 20 commodities. NBOT, however, is more specialised, for soya bean and the like.

As with equity markets, these also have exchange-listed brokers offering you their services-from offering information and advice to executing trades. The integrated risk management systems of the exchanges also resemble those of the equity exchanges; members have margin-linked limits, and outstanding positions must be squared in accordance with the rules.

Making Use Of It

Making money on commodities, though, is not quite the same as in equities. As Sabnavis says, it's pretty much about fundamental market forces, and that makes it all the more interesting-because it brings actual ground information into the arena, and in a global context too. What information is the commodity's price sensitive to? That's the basic question to answer. You can start by zeroing in on a commodity, learning everything there is to learn about its production and usage, gathering data on the dynamics of supply and demand (cycles et al), and then trying to predict what could happen next to its price. Once you get used to the concept of analysing a market on basic factors, it won't be too far-fetched to be watching events in Madagascar to take a bet on vanilla, say, or in Vietnam or Brazil for coffee.

Ferrous metals, edible oil and grain have their own dynamics, and once you make yourself a basic framework for analysis, you might find the going less taxing than watching companies-with all their internal and external complexities-in the hope of predicting their stock price movements.

Less taxing, but not simple. Commodity markets have their own details you must acquaint yourself with. They do not always operate in isolation of each other, for instance, just as two competing companies affect each other, and you may have to keep track of events in related fields as well. Mutually substitutable commodities (with high so-called 'elasticity of demand') influence each other strongly, as should be obvious.

Traders tend to concentrate their attention on the relatively non-substitutable commodities. Markets here are always more liquid. Gold, for example, has held its allure down the ages, and remains the recommended first-timer commodity. But then, this is not a simple demand-supply story, given the special place the metal has as a 'store of value' and hedge against any gross uncertainty in the financial world order (be it risks of inflation, currencies or even a larger 'shock' to the economic system). This makes gold trading relatively complex, but it also sets your big picture for you before you start figuring out the rest; just as oil does for so many international investors. In your case, of course, oil would serve as a 'lead indicator' for other things.

It would all be so much easier if experts would get into the business on your behalf, wouldn't it?

Commodity mutual funds, anyone? These may take some time coming, since plenty of regulatory issues need to be sorted out. Once they do, you might want to buy into these. But even if this is your eventual plan, it helps to keep your eyes on at least one significant commodity-to help get that analytical framework in place. You'll never regret it.

What's Your Real Worth?

Ever thought about it-seriously? Try it. It's not an idle figure.

By Narendra Nathan

When Sunil Mehta approached his life insurance advisor, what he had in mind was an insurance cover of Rs 5 lakh-just enough to take care of his taxation planning. But then, his advisor set him thinking. He asked him what he considered his "real worth" to be.

Have you had occasion to think about it? It's not a natural piece of self information that you scribble effortlessly on data-forms: name, date-of-birth, nationality, real worth...

And it's not a question you'd like answering, even in the abstract. Life is life; putting it down to some individual figure sounds like an exercise in economic crudity-with the result that you've probably insured yourself for a paltry sum derived from two factors: your modesty and tax bill.

Don't blame yourself. To some extent, it's also a matter of industry legacy. In a country that tends to place a social premium on 'auspicious' talk over a temperament of mortal realism, life insurance has rarely been sold for what it is. It has been sold down the path of least resistance-as discovered by LIC agents. Get yourself insured, went their advice, because you don't want a hefty tax bill. And it's a solid investment-returns et al.

Returns? That's not the point, say private sector advisors these days. They are selling life policies simply for their core benefit. So if that's what it is, with or without a bush to beat about, what figure would you place on your life?

In a nuclear family with two or more dependents, the question assumes even more urgency. According to Ajay Arora, Managing Director, Data Comp Veb Technologies, there are two basic ways to arrive at a figure: the need-based model and wealth-generation model.

The former's purpose is to create a financial suit of armour that protects the fulfillment of your dependent's monetary needs, if need be. These include all expenses and loan repayments-to be indexed to inflation. This is the life-goes-on model, designed to keep your family's lifestyle intact.

The wealth generation model is for you if your family's lifestyle is not dependent on your earnings (returns on existing assets may be adequate). Yet, your loved ones would miss your ability to generate further wealth-an eventuality worth guarding them from. It makes sense, then, to make an estimate of the wealth you're likely to create till retirement, and arrive at the present value of your future earnings.

So go ahead, make your estimate. Is the figure alarming high? Don't worry; it's still an underestimate. Decades later, you might just be looking back at the figure and laughing your- self silly. What if Ripley's were to include it as a 'believe-it-or-not' nugget some day? Now that's a cheerful thought.