There was a time when commodity trading was only for the rich. Not any more. With e-commodities, even small investors can now partake of the commodity market boom .
The product enables small investors to buy commodities, especially precious and base metals, in small quantities, and hold them in electronic form. Offered by the National Spot Exchange (NSEL), it enables investors to buy, hold and liquidate the commodity or get it converted into physical coins/bars seamlessly.
The exchange offers seven commodities in electronic form-gold, silver, zinc, copper, lead, nickel and platinum.
HOW TO TRADE
To buy e-commodities, you will have to open a trading account with an NSEL member and a demat account with a depository. Your equity demat account will not work here.
You can buy units by paying 5 per cent of the price initially. You will have to pay another 10 per cent as margin for demat delivery. The full amount has to be paid in two working days.
Consider nickel. At Rs 1,253 per kg on 25 April 2012, an investor would have had to pay an initial margin of Rs 63 (5 per cent) to buy one unit (one kg) of the metal that day.
An investor has to pay, in addition to brokerage, a transaction fee based on turnover.
Ashok Mittal, chief executive officer, Emkay Commotrade, says, "The delivery brokerage is 0.3 per cent. This is similar to what is charged in the equity cash segment and varies from member to member and client to client."
NSEL also charges Rs 1,000 per Rs 1 crore turnover for delivery-based transactions. For intra-day transactions, the fee is Rs 500 per Rs 1 crore turnover.
Shining brightThere are over 175 empanelled depository participants or DPs. Some big names are Globe Capital, Religare Securities, Karvy Stock Broking, Aditya Birla and India Infoline.
For physical delivery, a fee is charged. The exchange also gives investors the choice of denominations. For instance, in gold, it offers the choice of one gm, 8 gm, 10 gm, 100 gm and 1 kg, while in silver, the investor can choose from 100 gm, 1 kg, 5 kg and 30 kg.
Anjani Sinha, managing director and chief executive officer, NSEL, says, "If an investor wants physical delivery, he will have to pay 1 per cent value-added tax and a conversion charge."
The investments also attract wealth tax and capital gains tax. Sushil Sinha, country head, Karvy Comtrade, says, "Short-term capital gains are taxed at the marginal tax slab rate while long-term capital gains, if the investment is held for over 36 months, are taxed at 20 per cent."
DELIVERING THE GOODS
To convert into physical form, the investor has to transfer the commodity to the exchange-designated beneficiary owner account by submitting a delivery instruction slip to the DP along with a surrender request form (SRF).
The DP will verify the signature and give the SRF back to the investor. The SRF has to be submitted to the exchange or its member. The exchange will give the date and time of delivery. It will also inform the buyer about the charges for lifting the commodity.
Beneficiary account is opened by investors to hold securities in demat form with a depository and carry out sale/purchase transactions in the book entry form through the depository system. A beneficiary account holder is legally bound by the rights and liabilities attached with the securities in the account.
It seems e-commodities can give good returns in the long run as compared with exchange-traded funds or ETFs. For instance, e-gold gave around 36 per cent return between April 2011 and April 2012, while gold ETFs rose 33 per cent in the period.
Anuj Gupta, senior technical analyst, Angel Broking, says, "The participation in e-contracts is growing at a tremendous pace due to few hassles, low documentation charges and low cost for conversion of units into physical commodities. ETFs have high costs because of asset management company (AMC) charges of 2.5-3 per cent. There is no AMC charge in e-commodities."
"Unlike ETFs, e-series products have better price correlation with physical commodities. The reason is that unlike ETFs, where only a part of the net asset value is invested in the physical commodity and the rest is invested in debt or cash instruments, one unit of an e-series product is an electronic warehouse receipt of one unit of the commodity. Thus, every unit of e-series investment is backed by physical commodity, which is stored in exchange-appointed vaults or warehouses," says Sinha of NSEL.
Further, e-series products do not have any underlying costs such as annual maintenance cost in case of ETFs, which reduces investors' return to that extent.