‘It’s a low-risk, low-returns business’

Does it make sense for retail investors to come into the commodities market? What precautions should they take?
There are approximately 10 per cent retail investors in the commodities market. And these are purely non-commodities (retail) traders we are talking about. The commodities market is largely influenced by international events. A retail investor must always keep track of international events and demand-supply situations of a particular commodity in which he is trading. In the commodities market, a retail investor has to compete with companies that have highly specialised knowledge. Nestle, for instance, has over 100 years of experience in cocoa so a retail investor is at a disadvantage. To overcome this sort of information asymmetry, it is essential that the investor has access to timely and sound research and advice. This is one of the reasons that, globally, commodities trading is more a physical broker-related phenomenon compared to equities.

If it’s a low-risk, low-returns business, then what is the advantage for the retail investor?
The commodities market offers a retail investor a chance to diversify his portfolio. Simply put, the commodities exchange gives him a third option for investment. He can now invest in equities, gilt and also commodities — and thus spread risk across a cross-section of investment avenues.

Are there enough regulations in place for commodities exchanges?
Well, all I can say is that the regulations that need to be in place have to be of the same level of sophistication as those in the equities market. But that will take time. However, efforts are on to try and put a framework so that volatility is under control and margins are applied. These steps are important for all participants of this market place.

Is there a safety net for the retail investor?
Like any other exchange, there is a Settlement Guarantee Fund with a corpus of Rs 320 crore for NCDEX (National Commodities and Derivatives Exchange) and like in any other exchange there is a Clearance Corporation. I think that’s enough as a safety net.

Apart from bullion, which are the highly-traded commodities?
Trading is picking up very fast. The volume on the exchanges has been rising in the last five-six months. Guar seed, edible oil and wheat are some of the highly-traded commodities.