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How To Allocate Commodities In Portfolios

Commodities are tangible goods, such as precious metals or cattle, that may be consumed directly or utilised to create other products. They are becoming a more popular investment option. It may be worthwhile to incorporate them into your long-term portfolio. However, you should be prepared.

Fundamentals of Commodities in a Portfolio

Speculating on the price of commodities is not the same as investing in them, which is a huge difference. If you are interested in making financial investments using this strategy, you may want to explore opening a commodities trading account and engaging in futures contract trading. However, opening a trading account without a track record, prior expertise, or a predetermined trading plan is more akin to speculating than investing. It usually takes some time, resources, and effort to learn how to trade and make money over a period of time. While you are still learning the ropes, you should not trade commodities with money that you depend on but rather money that you can afford to lose.

Commodities might be one asset in a long-term portfolio that you plan to utilise for a future purpose, such as income to help pay for your retirement. Using this strategy, you would invest a part of your wealth in commodities. For example, you might invest 5% to 15% of your portfolio in commodities. However, select those that will be around in 20 to 30 years.

Where and How to Invest?

Direct purchases may be made of various commodities. Using this approach means you will be responsible for making the purchases yourself. In addition, you may receive exposure by purchasing mutual funds that are formed of the shares of firms that deal with various commodities.

You also have the option of investing in ETFs. Participation requires the trading of futures contracts or ETFs that integrate commodities or commodity indices. But, again, this method might be the riskiest if you don't use the skills of a seasoned analyst to execute managed futures transactions on your behalf via an account.

Advantages of Including Commodities

Investing in commodities may provide a number of advantages. When there is an increase in demand, commodity prices often go up as well. It decreases as the supply increases. This kind of portfolio could give you higher returns than an asset allocation that is split between stocks and bonds, but that will depend on how the market is doing.

The stock market's performance is not always reflected in commodities pricing. Contrary to businesses, goods can never be declared bankrupt. You may better protect yourself against unexpected drops in the stock market if a portion of your investment portfolio consists of commodities instead of equities and bonds. It's possible that an investment in commodities might help you weather the storm of inflation without exposing you to the same level of risk as an investment in stocks and bonds. Historically speaking, commodities have performed very well during periods of inflation, even while equity and credit markets have suffered losses.

Wrapping Up

Commodities may aid in the diversification of a long-term portfolio. They may boost your results if you understand the difference between speculation and investing. You should be aware of the benefits and risks. Opening a commodities trading account without a strategy is speculative. Only funds at risk should be utilised.

Investing in commodity funds via managed commodity accounts allows you to obtain exposure at a lower risk than trading commodities on your own. Contrary to popular belief, commodity trading is not as complex as it may seem, especially with the aid of live commodity prices. Opening a Demat and trading account is essential if you are trading derivatives or investing in upcoming IPOs.

Related Articles: Can the commodity markets provide cues for equity trading | Beginners Guide to Agri Commodity Trading | 5 Successful Commodity Trading Strategies | Role of Commodity Markets In India 


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