Despite the recent NSEL fiasco and the worries surrounding commodities trading, an investor can still go ahead and invest in agri commodities. It would be advisable to go in for good commodities where spread trading can be done, because spread trading is less risky than trading Futures, says Kishore Narne of Motilal Oswal.
He tells investors to look for opportunities where he can buy soya bean and sell soya bean oil or buy mustard and sell soya bean. There are crops which are interlinked. These are extremely low risk strategies which require less investment as well as the risk is pretty low, because it is all about buying one commodity and selling the other commodity at the same time, says Narne.
"I do not suggest anybody to put more than 10 percent of the invested amount and do not put more than half of what the total amount of investment in any particular trade," he adds.
Below is the verbatim transcript of Kishore Narne's interview on CNBC-TV18
Q: Investor's father has taken VRS and got Rs 4 lakh. He wants to invest Rs 1 lakh in agri commodities. Is Rs 1 lakh enough pocket size to invest in commodities? Where does he go, because commodity derivatives have been under considerable shadow recently?
A: I appreciate that he would like to invest in commodities. The issue is that the size of investment, whether 25 percent of his savings should be invested or not is particularly an individual call. I would suggest because it is VRS money you should find some good commodities where spread trading can be done, because spread trading is less risky than trading Futures. There are opportunities like you can buy soya bean and sell soya bean oil or you can buy mustard and sell soya bean.
There are crops which are interlinked. These are extremely low risk strategies which require less amount of investment as well as the risk is pretty low, because you are buying one commodity and selling the other commodity at the same time. Other than that I would not suggest them to go all out and buy Futures or sell Futures. It will be too risky for him.
Q: He has Rs 1 lakh to invest. I am assuming that is the maximum he can risk. So out of that Rs 1 lakh how much should he put up as an investment, so that in case his call goes averse he has money to settle?
A: I think he should not be putting more than Rs 50,000 in a trade and within that a 10 percent of risk per trade, that is Rs 5,000 of risk per trade should be taken. Even 20 trade consequently going wrong will end you in risk of Rs 1 lakh. So I do not think it is too optimistic to think that my 20 trades consequently will not go into risk. So I do not suggest anybody to put more than 10 percent of the invested amount and do not put more than half of what the total amount of investment in any particular trade.
Q: We have seen the rupee tumbling against the dollar in the second week of August 2013. If you have already taken a position in bullion or crude, how will crude Futures pan out?
A: We have seen government doing whatever it is possible at this point of time to contain rupee depreciation, but nothing is working as of now for the government or Reserve Bank of India (RBI). So as of now I believe that rupee is going to be under stress for some more time, looking at the equity market selloff, looking at the kind of capital controls we are going to put up, the kind of negative sentiments we have in Foreign Institutional Investors (FII). More or less when you are trading these commodities which are internationally traded like crude and gold you also have to consider how their movement will be in the international markets as well.
Crude particularly is driven by uncertainty in the Middle East, overall economic factors, so as of now crude is going to be little bit strong in the global markets and as you have a depreciating rupee which will add to the strength in domestic markets, so I think it should be pretty much long in the short-term. If you are looking at any view beyond 15 days or so then we are probably somewhere close to the top. So short-term trading you can buy, long-term trading you should be waiting for a higher level to go short.
Q: Will all the records of gold break looking at rupee and gold rates? When you are in an economic scenario like ours where there is a weak economy, so gold is already considered a safe haven. The government is trying to curb imports, but despite that there is a substantial amount of demand and a falling domestic currency is lifting prices beyond what the fall is in international markets. So you have a Rs 30,000 plus on 10 grams of gold. How do you assimilate this scenario in bullion investment?
A: On domestic markets, the strength is certainly going to sustain for sometime now. Whatever the government is trying to curb is again working against it. The investors would continue to buy gold because gold prices have been seemingly going up in India. They do not bother whether the gold price is going up because of import duty hike or because of rupee depreciation, just because they are seeing the gold price going up from Rs 28,000-30,000 and whether this goes to Rs 32,000 is the question which investors normally take up.
So at this point of time we believe that, yes in domestic markets the premiums of gold has been significantly higher when you compare it to the landed price of imported gold, because the availability of gold itself has been pretty low because of the import curbs and the dealers are charging much more higher premium, almost Rs 600-800 premium is what right now is being paid and the 10 percent import duty and all those things.
So I believe in the short-term globally also coal prices are going to go up anywhere close to Rs 1,400-1,420 kind of levels which would take domestic gold beyond Rs 31,000 at this point of time. Rupee depreciation will add some more fuel to this, so safely we can assume that Rs 31,000 was slightly higher than that we can reach.
Whether it will breach the previous high and make a new record high or not is an extremely difficult question at this point of time, because there is a government which is putting enormous effort to contain the rupee and government can do much more substantial to control that. If they do something like that and if we say that rupee will not go to 64-65 which is the levels which are going on in the market and it comes back to 58 or 59 over the next couple of months, then gold prices in India will be substantially impacted.
So I am not believing at this point of item that we will have a significant rally beyond the previous high, but we can always go close to previous high and maybe come back from there.