18.7 How to invest in commodities?

Difference between stock and commodity derivatives

So, what are the options for investing in commodities? As an investor, people can use many vehicles in commodity investments. For example, let us take the example of sugar. Now, you can buy sugar in spot market, or you can invest in company with particular commodity business - for example, Renuka Sugars, or you can buy the futures of sugar etc.

Investment avenues in commodities are as follows:

  1. Commodity Spot - Here, the commodity is traded immediately in exchange for cash or some other good.
  2. Commodity Futures - A standardized agreement to buy (or sell) an asset in the future at an price agreed today.
  3. Commodity Exchange Traded Funds (ETFs) – Commodity ETFs generally are index funds and track commodity indices. (not very common in India, as of now).
  4. Commodity Stocks - Stocks which belong to commodity related sectors like metals, energy, agriculture, etc.
  5. Commodity Mutual Funds - Mutual funds which invest in stocks belonging to commodity sectors or fund of funds which invest in other commodity funds etc.

In India, investors exposure till date has been mainly through futures trading and commodity stocks, etc. However, commodity exposure through platforms like mutual funds, etc. is now gaining ground.

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