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 Did
you know that you can play a role in determining the price of
black pepper and also make some money in the process? Commodity
futures, which were introduced in India 18 months ago, have huge
potential in an agrarian economy like India. Worldwide, the turnover
in commodity markets generally exceeds that in the equity markets
by a factor of three. And there's no reason to believe that India
will be an exception to this trend.
Three are three commodity exchanges in the
country-National Commodity and Derivatives Exchange (NCDX), Multi-Commodity
Exchange of India (MCX) and the National Multi-Commodity Exchange
of India (NMCX). All three have electronic trading and settlement
systems and a national presence.
There are two ways to trade in commodities.
The first is spot trade, in which you pay cash and carry away
the goods. The second is futures trade. Here, one can buy or sell
a commodities future on an exchange based on one's perception
of where the price will go. Futures have an expiry date (of anything
from one to six months) by when the buyer or the seller either
closes (or squares off) his account or gives/takes delivery of
the commodity. It works just like the stock market where one can
close an open position and book profits or losses or take/give
delivery of the stocks purchased/sold. Volumes in the commodities
futures market-at around Rs 5,000 crore per day-have already reached
about half the levels of those at BSE and NSE. "The commodities
futures market is expected to grow exponentially from Rs 1,100
crore in 2005 to Rs 20,000 crore in 2009," says Sampa Bhasin,
Associate Director, Transaction Advisory Services, Ernst &
Young. "The main function of commodities futures is price
discovery and price risk management," says Jignesh Shah,
Managing Director, MCX.
Commodities' 10 Commandments
If you're interested in entering
the world of commodity futures' trading, read this first.
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| 1.
Identify AN exchange: There are three commodity exchanges,
National Commodity and Derivative Exchange, Multi-Commodity
Exchange of India and National Multi-Commodity Exchange of
India
2. Identify A broker: Several
brokers like Refco Sify Securities, SSKI (Sharekhan), ICICIcommtrade
(ICICIdirect), ISK Comdex (ISJ Securities) and Sunidhi Consultancy
have sought membership at NCDX and MCX.
3. What you can invest: Minimum
investment is Rs 5,000, plus margin money, which could be
anywhere between 5 per cent and 15 per cent depending on
the commodity.
4. Delivery or cash: You have
to indicate at the time of placing the order whether you
want to settle the contract in cash, or want delivery of
the commodity. However, this option can be changed till
the last day of expiry of the contract. For delivery, you
need to take the warehouse receipt (which you get on your
demat account every time you buy a commodities future) to
the broker, so that you can collect the commodity while
settling the deal.
5. What you need to trade: A
separate commodity DEMAT account from National Securities
Depository Ltd., for which you have to provide your PAN
number, bank account number and proof of residence.
6. Brokerage and transaction charges:
Brokerage is 0.10 to 0.25 per cent of the contract
value (for cash settlement; for delivery, it is 0.25 to
1 per cent). Transaction charges are Rs 6 to Rs 10 per lakh
per contract.
7. Information on commodities: Financial
dailies and specialised magazines carry information on commodity
futures. You can also access information from the websites
of commodity exchanges, and research and analysis reports
prepared by brokers.
8. Regulator: Forward Markets
Commission
9. Commodities you can trade in:
Gold, silver, oilseeds, spices, steel, cotton, pulses,
rice, wheat, maize, crude oil, rubber, cashew, sugar, guar
seeds and gur, among others.
10. Taxes: If you take physical
delivery of the commodity, you pay sales taxes. Otherwise,
you pay short-term capital gains tax.
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How
They Differ
Here's how trading in commodity
futures differs from that in equity futures. |
| Trading
time: Stock markets close by 4 p.m., but commodity
exchanges are open from 10 a.m. to 11.30 p.m.
Life cycle: Equity futures
have a life cycle of three months. But the contract duration
in case of commodity futures varies and can be between one
month and six months.
Warehouses: Unlike equity
futures, there is a warehouse where the commodity you are
trading is stored. So you have the option of taking actual
delivery of the commodity.
Understanding: Commodity futures
are easier to understand compared to equity futures, as
one has to just keep track of demand and supply and not
the several financial parameters involved in the latter.
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According to Shah, 75 per cent of the investments
made by retail investors in the Indian commodities market is in
gold and silver (See Hot Commodities). "Crude oil is also
becoming popular with retail investors," he informs. In February
this year, Union Minister for Petroleum Mani Shankar Aiyer inaugurated
futures trading in crude oil. In the six months since, crude futures
volumes have already touched the Rs 1,000-crore-a-day mark.
Currently, futures trading is permitted in
more than 110 commodities; these include fibres, spices, edible
oil and oilseeds, metals, pulses and energy products. Physical
deliveries are affected in barely five per cent of commodities
futures trades, but as the market grows, this is expected to rise.
The need of the hour is greater numbers of warehouses offering
deliveries. The existing ones also need to be upgraded and modernised
and the state warehousing companies privatised.
The regulator-Forward Markets Commission-has
formed a committee that is working on the introduction of mutual
funds in the commodity market. This committee also wants to allow
foreign institutional investors and banks to invest in the commodity
markets. Once this is allowed, institutional money will flow into
the system and volumes in the commodity exchanges will increase
manifold.
Not For Real Yet
Real estate funds are here, but only for
high net worth individuals, institutions and corporates. Retail
investors are still waiting for a look-in.
By Amanpreet Singh
 It
had to happen sooner or later. The Indian real estate sector has
been on a roll for the past five years. Fuelling this boom is
a happy combination of higher income levels and cheaper bank loans.
Prices have been rocketing upwards, but short of buying an apartment
or a shop-with all the attendant hassles of securing bank loans,
getting the documentation in order and checking out the antecedents
of the property concerned-individuals couldn't really cash in
on this boom. That has now changed. In April, 2004, stock market
regulator Securities and Exchange Board of India (SEBI) removed
the sector from its negative category list for investment by venture
funds. Following this, several real estate funds have been launched.
How They Work
A real estate fund invests money raised from
institutions and individuals in properties. For example, HDFC
Property Fund looks at commercial real estate only; ICICI India
Advantage Fund iii invests in commercial and residential properties;
and Kotak India Real Estate Fund targets hospitals, hotels and
commercial and residential real estate. Returns for investors
are in the form of dividends accruing from rents and capital gains
at the time of sale.
But wait a minute before reaching for your
chequebook: only institutional investors, banks, corporates and
high net worth individuals can invest in real estate funds. The
minimum investment: Rs 2.5-5 crore. "Real estate funds are
not liquid as they are not listed; they are meant only for high
net worth individuals," says Kishore Gotety, Director (Investment),
ICICI Venture Funds Management Company.
| What You Get |
| Real estate
funds provide another diversified asset class for the investor
and add different cities to an investor's portfolio, which
is not always possible while buying property. The fact that
it is a long-term investment ensures that it rides business
cycles more easily, making it less volatile. You also get
a chance to invest in land development. The most important
factor is that real estate is a tangible asset. This ensures
that you'll never lose your shirt. |
What could galvanise the market and give retail
investors a slice of the booming real estate pie is the formation
of REITs (Real Estate Investment Trusts), which, worldwide, are
listed entities that take exposure to properties for rental income
streams. Dividend payouts are tax-exempt. If and when REITs are
allowed in India, the returns would work almost like a monthly
rental income from a 10-year lease for small investors, and REIT
units can be traded like any other instrument. "This will
give the younger, and less affluent, investors another investment
avenue," says S. Sriniwasan, CEO and Executive Director,
Kotak Realty Fund.
What will it take for SEBI, the Reserve Bank
of India and the Finance Ministry to open the doors of real estate
funds for small investors? Says K.G. Krishnamurthy, CEO and Managing
Director, HDFC Property Fund: "Funds like us have to first
prove that we can make money for investors." Watch this space.
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