A beginner’s guide to commodity markets

The wheat used to make our chapatti, the cotton we wear in our clothes, the gold used in our jewellery, the fuel that runs our cars, etc; are all traded across the world in major exchanges. Outside the equity fanatic world exists’ a small but powerful community, which earns a good amount of money by trading in these items. Earlier it was more done in need based form or barter as we can term it. But now it has taken a huge gigantic shape and size. This market is commonly referred as commodities markets.

A humble beginning – Gap between demand & supply

In India organized form of commodity trading market started in 1875, when traders came together in Bombay Cotton Trade Association. It later got converted into Bombay Cotton Exchange Ltd. Later on oilseeds, castor seeds, groundnuts, spices and materials like jute etc joined the commodities market.

With the beginning of economic liberalization, importance of organized commodity trading had gained momentum. Commodities markets are governed by the Forward Contracts (Regulation) Act, 1952. It is a division of the Ministry of Consumer Affairs, Food and Public Distribution. As early as 2002 (ten years after liberalization), there were around 20 commodity exchanges in India, trading in 42 commodities.

What is commodity market?

A commodity market is a highly volatile and risky derivative market. It deals in future pricing trends of the underlying commodities. The Commodity index constituted on NSE is not same as the commodity market. These offer immense potential to become a separate asset class for real taking investors, arbitrageurs and speculators.

Where do commodities markets invest our money?

The exchanges deal in agricultural products, metals including precious metals and energy resources. Some of commonly traded items:

Agricultural	Industrial Metals	Precious Metal	Energy
Coffee	Copper	Gold	Crude Oil
Sugar	Lead	Platinum	Natural Gas
Cocoa	Zinc	Palladium
Maize	Tin	Silver
Rough rice	Aluminium
Soybean	Nickel
Wheat
Sunflower Oil
Barley
Dal

               (Source – Kotak Commodities)

How we begin commodity trading?

1)  Choose your broker

You can begin trading in commodities by registering with brokers who are affiliated in either one of the national commodity exchange market in India:

1)   National Commodity and Derivative Exchange –

 http://www.ncdex.com/Index.aspx

2)   Multi Commodity Exchange of India Ltd - https://www.mcxindia.com/

3)   National Multi Commodity Exchange of India Ltd - http://www.nmce.com/

These exchange facilitate trading and settlement in commodity markets. Globally, to deal in precious metals we have to register or fid a broker for NYMEX, LME or COMEX. A complete list of brokers can be made on respective websites.

2)  Deposit Margin Money

Margins are of two types, the initial margin and the maintenance margin. They vary with commodities and exchanges usually the initial margin ranges from 5-10% of the contract value.

The maintenance margin is mostly lower than the initial margin. They depend on the movement achieved in the customer’s account depending on his mark to market position. If there is any profit there is an option to withdraw any extra funds from his margin account. However, if the account falls below the minimum requirement the investor needs to top up his account to the minimum. The trading can begin with as low as Rs.5000.

3)  Read about the commodity movements

Read financial newspapers for information on spot prices and for relevant news and articles on most commodities. Weather and other government policies also play a major role in these products, so keep an eye on them too. Brokers also provide research and analysis support. Beyond this for precious metals and energy resources global news are very significant impact makers.

So once the above is done, you just need to attach your bank account to the broker trading account and create a demat account for commodity trading like equity. The charges and brokerage would be made available by brokers at the time of signing of contract.

Commodity trading is most done as speculative trading so the preferred mode of settlement is cash but if you want to take delivery on expiry of contract, the exchanges do have warehouses. So, in that case you need to preserve the warehouse receipts. In case of physical delivery, you might be charged sales tax. 

Where can I go in case of any complaint or default in contract?

The FMC maintains details about the exchange administration and seek timely intervention to inspect the books of brokers. In case of any misappropriation or foul practices are found or if the exchanges themselves fail to take action, the FMC would step ahead.  If there is any default in settlement by either party in contract, then the exchanges maintain sufficient funds to protect the investor from any loss. 

So go ahead and take a plunge, in the really interesting world of commodity trading.”Aate dal ka bhav pata chal jayega”, I mean it literally.

Regards,

Saarthi Financial Planners

Financial Planning for Women

It is surprising that in a country like ours, where we have women leading some of the big names in banking and financial industry, the financial literacy among women is as low as 16%. (survey by National Centre for Financial Education). Women who manage their home expenses and emergencies so well, feel intimidated by the investment jargon and strategies.As a financial planner, we might treat both gender on parity but the truth remains that women need more emotional connection and simplicity on planning over men.

Why this difference?

Women in addition to planning for her family goals has to shoulder responsibilities for her own individual identity. In India, we have a lower women working force between mid 20's to mid 30's. In this period, women tend to take a back seat on her career front to manage her home, start family and above all be a dutiful mother to up bring a well mannered child. Women have always remained in shadows of their male counterpart- initially the father, later her husband and lastly her son. This has made women so financially dependent that they are never able to take decision for themselves.

So, what if any catastrophe was to remove any of our sheltered provisions? What if you have to shoulder the responsibility of your widowed mother or up bring your children alone due to your spouse death, disability or divorce? Are you ready to balance the dual roles of a money earner and investor? Do you know the basic plan to be kept ready if you have to start from zero?Today,we shall be focusing on some of these pointers to be kept in mind for any women fending for herself and her family.

a) Identify the working hands and mouths – It is necessary to list out in case if you have any additional source of income from previously made investments. Ask all sort of questions to your insurance agents regarding the policies of deceased person to confirm the same. There could be any pension amount to be made available over the death of Provident fund member. In case of divorce, are you expecting any alimony? Is it one time or regular over time? 
 

Once, you have answer to these questions, add what is your monthly income going to be. List out all the essential expenses and other ad hoc expenses. The best way to identify them are to read previous cheques book descriptions, bank account narration or study credit card bills. This simple exercise would help you prepare monthly cash flow requirement.

b)Put aside emergency funds – Out of the lump sum funds received on happening of any of the above incidents, keep out 3-6 months expenditure funds aside to act as contingency for some emergency requirement. It can be parked in a Bank FD, Liquid Funds or in separate savings account.

c) Revise your life cover- Previously, as a women you might not be the primary income provider. Hence, it is now necessary to raise/avail your life cover to support your entire family needs.

d) Re work on your goals- It is possible that you had previously planned different goals towards family and for yourself. However, now with different situation, it is reshuffle the goals – in terms of priority, allocation of surplus and lump sum amounts. Also, include the new lump sum made available. It is necessary to note that unlike men, women prefer to prioritize family over rest. So if you plan to take a break for your sibling or children's education landmark years remember to save for these years.

e) Plan your estate distribution – List down all your assets, personal valuable belongings , pieces of jewellery or even expensive designer wear and make a plan to give out to your next generation. Don't leave any loose ends, which can cause uproar after you in your family.

Thus, we wold like to say that although men or women are equally capable of making good decisions, women mostly don't exercise their right. It is necessary for women to now be prepared for any catastrophe.

Just don't ignore it

My mom's mobile's bill date is same as mine. I prefer to pay my bill online via debit card or net banking mainly to avoid delay or inconvenience of visiting the physical outlet of the mobile company. I usually remind her to make her payment when I make mine or offer to do it so from my side. However, she usually refuses to take any help from me and prefers to make her own payment at the mobile store. Out of ten, in nine instances she misses the last due date and pays penalty on her bill amount. Also, whenever she makes any payment she is habituated to round it off on a higher side so as to avoid multiple note transaction.

This is just of the example where we find people not only make excess payment but at times even just let go extra money due to their casual attitude. We might be calculative in our big numbers but when it comes to small penny calculations, we are okay with the mismatch. For us , if the dhobi counts 50 clothes over our count of 45,we are OK with the difference of 5 clothes as it maybe our counting error. If we go to refill our fuel tank for Rs 200 and the attendant tells us he doesn't have change of Rs 500, we ask him to fill for the entire amount. We go to buy our daily grocery or shop at supermarkets, the attendant tells us that we are short of Rs 100 shopping for a weekly bumper draw, we buy an unwanted item to meet the target.

However, when there is a addition in any tax cess or rise in fuel costs, we all make noise over it. We can't bear to see the fact that we need to shell out an additional percentage for welfare of our country men but don't blink an eye when private tutors increase their fees. We hollow our thinking between our own and not so own.

What we need is a clear demarcation between need and want, urgent and not so urgent requirement. If we have made a budget of our requirements, why do we fumble at every given opportunity. Why do we change our step to match the external changes. If things are getting expensive, we have to consume it less and not pay more over shooting our budget. However, areas where we can control like making payment on time, avoiding over spending for paltry rewards, we should try to do it. 

 

Take help of your planner today and get a personalized budget as per your own requirement. For detailed conversation email us at saarthifp@gmail.com

Are you really financially prepared?

Most of us associate goal achievement with fulfilling of our family responsibilities. If we are able to meet these responsibilities then we assume we don't need any financial planning. We hear many statements from our clients mentioning that we don't need any kind of planning,we have sufficient funds in place, I have crossed the age of planning and many more such statements. As a Financial Planner when do we say that the client is completely prepared for all his financial requirements.

Simple questions to check your financial independence:

• Can you completely leave your active working life to survive the rest of your life?
• Can you bifurcate your existing assets for your different goals and achieve your goals without any further twitching?
• Have you settled all your liabilities and can still manage your goal achievement?

Myths Busters : A few myths attached with goal achievement.

• Inflation – We make certain annual calculations as per our current expenses and assume it to cover all our requirements. Like you say, I have two land properties that will grow in value terms in coming few years and it will help me to cover for my daughter's wedding expenses or my retirement. However, the biggest road block in this growth is inflation – the increasing cost of living.The average inflation increase over the past few years have been around 7-8%. This means that every year the cost of essential goods has increased by 8% per annum. So, if you have think you have saved for retirement to maintain your lifestyle as per current expenses it is not sufficient.

• Insurance Policies - Owning number of polices especially expensive endowment or whole life policies is not sufficient. Endowment policies assure good amounts on maturity including hefty bonuses however these good amounts are not sufficient to cover your life expenses. More so even the monthly pension that we receive may not be equivalent to the monthly home expenses.

• Expecting family wealth - Many times, we delay or avoid our financial planning considering that we are going to own a huge amount of family estate as lineage over the coming times. It might give us a mental satisfaction but does not assure any concrete guarantee of the amount to be received. The only possible thing is if in case the amounts are not as per your calculations, you might suffer in your sunset days. Like if you get a property out of the estate and you expect to make good profit out of selling it. It could be possible that the property market at the same time is at its bottom low and the desired price cannot be achieved.

• Fixed Asset Allocation – Allocating assets across your goal requirement or identifying which asset would help you meet your goal is better then leaving unplanned assets. However, leaving the allocation unchurned or not reviewing it is equally harmful for goal planning. Assets should be regularly reviewed and monitored to match the goal requirement. Change in policies, taxation rules could make any particular asset class less attractive. So, it is necessary to keep on reviewing it regularly.

Hence, we state that even though you own assets and have sufficient monetary cushion, it is required to continuously monitor your decisions. A plan is never perfect and it gets better with every further review.

Investment avenues for special dependent

As discussed in our previous article, we need to save for the entire life of disabled dependent. It is not so different from saving for any other goal. The only difference lies in the availability and management of these savings for the sole welfare of the disabled dependent. So, in order to ensure that you plan well your investments, we should take care of following points:

• Regular Income
• Maximum Tax benefit
• Lowering investment charges
• Clear nominations
• Appointment of Guardian

For Regular Income – To ensure that you get regular income for your dependent directly credited in their bank account, investment is recommended in fixed and secured investments. It should be made irrespective of the low rate of returns. It should be made for longer duration and also preferred to be tax efficient. The quantum of this investment should be calculated by living expenses requirement. Suppose, you require Rs.60,000 per month for living, you should invest around Rs.80,00,000/- to support your lifestyle. Some of recommended asset classes would be:

• Fixed Deposit – It is simplest to operate and ensures that capital is secured.
• Real estate- It is recommended you create a real estate rental income in their name so that this income can supplement his monthly income requirement. Please ensure you nominate the dependent and let it be managed by a guardian.
• Liquid funds – These funds are to meet the emergency requirements of health. It could be possible that even though you may take some additional health cover for the dependent, it has some exclusions and gaps to be filled.
• Equity funds- Even if you favour equity based exposure; it should be ensured that it generates some regular income like dividends or high dividend yielding stocks.

For Tax benefits – Be aware of the various deductions under section 80 for the disabled dependents.

• 80U- Deduction to be claimed in case of self disability. The said definition of disabled is defined in the IT Act, 1961. Amounts amended in latest budget as Rs75,000 for person with disability and Rs.1,05,000 for person with severe disability. To avail the deduction, a certificate is required from the certifying medical authority (approved by the government).  At the time of filing return, be sure to fill the required separate forms.

• 80DD – Deduction can be claimed for dependents for expenses borne by assessee. Dependant means spouse, children, parents, brothers & sisters of the taxpayer. The expenses can be claimed for medical, nursing or rehabilitation of the dependent. As per the latest budget, the allowable deduction is for disability from 40% -80% - Rs 75,000 and beyond 80% - Rs.1,25,000.

Insure your life – Life insurance is taken to cover the life risk from any kind of untold eventualities. However, when you have a disabled dependent it is always advised to have a policy with sufficient sum insured (at least 10 years of your current annual income) in the name of earning member. There are whole life policies, which can be left as a nomination to the dependent. This will ensure lump sum payment in case of any fatality. There are even special plans, which give accumulated amounts on maturity of policy and then again, on death of insured. Although, it could be expensive investment, it can be used as a diversification tool.

Creation of trusts - The specific trust created for the welfare of dependent frees one from any kind of fear regarding the misuse of the attached assets. We just need to follow some few rules will creating a trust:

• Create a trust with exclusive purpose (specific trust) to provide regular monthly income to dependent and bear all medical contingencies.
• Attach all investments especially real estate to ensure the rental income is not misused.
• Get a well trusted person to manage the regular working of the trust. Ensure timely audit to avoid any misuse of funds. It should be created in your life time.

All the above investment avenues are to be double sure that the dependent is not left in any financial crunch after you. It is essential that the process is started at earliest. If it is not possible to fund the requirement at its fullest make the minimal investment as possible.

Financial Plan for differently abled dependents

As a family, we go through a cycle where an individual first gets married, has children, for whom we plan to provide good living and education, make them independent- both emotionally and financially and then look forward to our own sunset years with our spouse. For every stage of life we plan and try to match our income with the respective goals. However, there could be situation where an individual is incapacitated to be on his own or to lead an independent income life;thus our responsibilities do not end. The discussion in this article mainly focuses on dependency due to certain physical or mental disabilities.

As per Person with disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, a disability under the act is defined is person suffering from:

• Blindness;
• low vision;
• leprosy-cured;
• hearing impairment;
• loco motor disability;
• mental retardation;
• mental illness

When we have a dependent in our family, who suffers from this kind of disability we need to make provisions for the dependent in our working age, to ensure that they are never financially weak at any point of their life. So, when we are planning for the financial security for the dependent, we need to take care of following aspects:

·   Cash flow Amendment – When a disability is discovered at an infant stage, it is natural that as parents we want to manage all the responsibilities of your child however, as the child grows he might need external support like a medical attendant or home maid to attend to their needs. So, when we plan our expenses we need to include expenses like medical expenses, expensive treatments and external help or even consider their survival expenses as they may outlive you.

· Plan for it as immediate goal- Treating the dependency survival goal is similar to our own retirement goal, which is equally important and needs to be prioritized over any other goal planning.  

· Select a right guardian – Appoint a third person as guardian who can take decisions in absence of parents. This will create a buffer in case of any important decision to be taken if we are not around.The decision should be made legally and well documented to avoid mayhem in later life. So, if you have made provisions for the dependent you are ensured that there will be someone to execute the plan for you. It is important to note that after 18 years of age, if you need to provide for adult, you need to apply for guardianship even if you are his parents.

·  Develop a business for them- Disability doesn’t deter any human being from adapting alternative skills to sponsor their own expenses. It is recommended that you work towards developing their other sensory skills and identifying them at earlier stage. Today, there are various provisions made by government to reserve work quota or give concessional loan rates for differently abled people. It is recommended to be an active member of various self help groups of people suffering of similar disabilities and join hands to start a small venture. This will ensure that a feeling of self dependence is created in the dependent and a life time regular income is generated.

In the next article, we will discuss the various areas where an individual can invest to save for his financial dependents or possible means to secure their lives.

 

Regards,

Saarthi Financial Planners
www.saarthifp.com