In 2011, investors turned to newer areas for diversification

Last Updated: Mon, Dec 26, 2011 19:50 hrs

Poor returns, uncertainty in equities saw move to new asset classes, often rather risky avenues.

Anjani Sinha, managing director of the National Spot Exchange, is busy responding to queries on investment in platinum. And, has planned to launch an e-series in this costliest of precious metals.

Retail investors, he says, have flocked to many new commodities this year. They had little option, given the fact the stock market had suffered and real returns (returns adjusted for inflation) from debt were in the negative. As a result, most investment options, which were likely to beat the market, had to be riskier. Commodity brokers agree retail participation has increased. The total turnover on all domestic commodity exchanges is up six per cent this year, whereas equities saw a dip of 26 per cent (cash and derivatives).

Sinha says his Exchange saw 720,000 new retail accounts this year. Of this, 110,000 hold copper and nickel. Data from the exchange showed e-copper (launched in October 2010) saw a rise in turnover since February 2011. Between October 2010 and January 2011, the turnover was Rs 4,175 crore, which increased to Rs 5,012 crore in February and Rs 6,550 crore in March. It saw a small dip and then rose to Rs 7,000 crore. E-nickel (launched last month) has seen a jump in turnover from Rs 36.5 crore to Rs 422 crore.

Investors have joined the commodity bandwagon to cash on commodity-driven inflation. Also, copper prices globally have fallen 20 per cent and were flat in the domestic market. Nickel has fallen 10 per cent in India, whereas gold has jumped 30 and silver 12 per cent.

Silver has managed to attracted some attention. Says Raghvendra Nath, MD of Ladderup Wealth Management, “Silver prices were very volatile this year. Traders, more than investors, used this opportunity to diversify into this commodity and gained quite a bit." Silver prices were near Rs 47,000 a kg in December 2010, went up to Rs 75,000 in April and are now near Rs 52,500 a kg.

Those with a relatively less risk appetite took the international feeder fund route. According to mutual fund rating agency Value Research, these funds have lost between 1.5 to 14.5 per cent. DWS Agri Fund stands flat at minus 0.35 per cent, DSPBR World Gold fund has lost 1.6 per cent and Mirae Global Commodity Stock has lost 13 per cent.

Vishal Kapoor, head-wealth management, at Standard Chartered, says, “High commodity prices saw investors making money. There are inherent associated risks -- currency conversion rate and additional taxes." As a portfolio diversifier, those with moderate risk-taking ability should invest up to 10 per cent of their alternative asset portfolio in these. Aggressive investors could go up to 25 per cent.

Retail investors have flocked to many new asset classes this year to diversify their portfolio
Portfolio diversifiers Professional  Returns 
Liquidity How much
to invest (%)
Copper Retail investors 2.2* Can be traded
on National Spot 
Nickel Retail investors -10* Can be traded
on National Spot
Silver Traders 12* Can be traded 
on National Spot
International Feeder 
HNIs -0.35 to 
Liquid 10 (alternate 
Real Estate NCDs HNIs 18 to 25 Illiquid 15 (growth portfolio)
Private Equity HNIs 25-30 Illiquid 10
*Domestic price Source: BS Research Bureau and Value Research

Aggressive high net worth investors were seen participating in real estate non-convertible debentures (NCDs) and also private equity.

Real estate NCDs work on the same principle as those issued by companies. Though offering a higher rate of return, it is a loan where a builder pledges plots. Many a time, these are disputed. Hence, these issuances carry higher risk. Liquidating these NCDs is another issue. In a bad market, when banks tighten purse strings, real estate developers come to the public to raise funds via such issuances. Several real estate companies have come out with NCDs at a high coupon rate of 16 to 24 per cent. “This is a high-risk, structured debt product and out of the growth asset portfolio, one should allocate up to 15 per cent to these," says Rajesh Saluja, CEO of ASK Wealth Managers.

Many have also participated in consumption, engineering and infrastructure-led private equity investments. Analysts say one should not invest more than five to 10 per cent of his/her portfolio in these.

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