Diversification and Inflation Protection in the Indian Market
Commodities are physical goods such as gold, silver, crude oil, and agricultural products that are traded in financial markets.
They are commonly used to diversify portfolios and protect against inflation.
This page explains what commodities are, how commodity trading works in India, and when they are useful.
What Are Commodities?
Commodities are basic goods that are:
- Standardized
- Interchangeable
- Widely used in the economy
Unlike equity, commodities do not represent ownership in a company.
How Commodity Markets Work in India
In India:
- Commodities are traded on MCX and NCDEX
- Regulated by SEBI
- Prices depend on global demand, supply, and economic factors
Most retail investors trade commodities without physical delivery.
Types of Commodities in India
📌 Precious Metals
- Gold
- Silver
- Used as store of value and hedge
📌 Energy Commodities
- Crude oil
- Natural gas
- Highly sensitive to global events
📌 Agricultural Commodities
- Wheat, cotton, spices
- Influenced by weather and seasons
Ways to Invest in Commodities
1️⃣ Commodity Futures
- Traded on exchanges
- High risk due to leverage
2️⃣ Commodity ETFs
- Track prices of commodities
- Easier and safer for beginners
3️⃣ Gold Mutual Funds
- Indirect exposure to gold
- No physical handling
Why Investors Use Commodities
- Portfolio diversification
- Inflation hedge
- Protection during economic uncertainty
Commodities often move differently from stocks.
Risks in Commodity Investing
- High price volatility
- Global event sensitivity
- Leverage risk (in futures)
Commodities are not suitable for frequent trading by beginners.
Who Should Invest in Commodities?
Suitable for:
- Investors seeking diversification
- Inflation-conscious investors
- Those with moderate risk tolerance
Not suitable for:
- Short-term speculation without knowledge
Common Beginner Mistakes
❌ Treating commodities like stocks
❌ Using high leverage
❌ Ignoring global factors
Key Takeaways
- Commodities are physical assets
- Useful for diversification and hedging
- High volatility compared to equity
- Best used in limited allocation
What Should You Read Next?
To finish Market Instruments: