Commodities Investing India: Why Now, How to Start

Commodities are cheap and unloved. Learn how Indian salaried investors can use ETFs and SGBs to add 5-10% commodity exposure for better diversification.

Let’s start with a scene that plays out in a thousand Indian households every month. Your SIP statement arrives. It shows your equity mutual funds are up 12 percent this year. Your provident fund is ticking along. Your fixed deposit is giving you a predictable, if unexciting, 7.1 percent. Everything is fine. Everything is balanced. Except for one quiet, nagging thought: you own pieces of companies that make software, cement, and two-wheelers, but you own almost none of the raw stuff that actually goes into making the world work. Think about it. The steel in your car, the copper in your wiring, the wheat in your kitchen, the crude oil that moves your cab. Commodities are the bedrock of every economic activity you can name. Yet for most salaried investors in India, they remain a blind spot. A recent note from asset manager VanEck put it bluntly: commodities are inexpensive, but no one owns them. That is a strange place to be, especially when we look at the historical playbook. ## The Case for Looking at Commodities Right Now Here is the specific fact that should make you pause. As of late 2024, the Bloomberg Commodity Index was trading roughly 25 percent below its 2022 peak. Meanwhile, global equity markets, including our own Nifty, have been setting fresh records. This divergence is not normal. Over the last 90 years, there have been only a handful of periods where the gap between commodity prices and equity prices stretched this wide. Each time, the subsequent decade saw commodities outperform stocks by a meaningful margin. Why does this happen? It comes down to a simple supply and demand imbalance. When commodity prices crash, miners stop mining, farmers plant less, and oil companies shelve rigs. That takes years to reverse. Meanwhile, demand for things like electricity, infrastructure, and packaged food does not disappear. It grows. When the supply side is this constrained and the demand side is this steady, prices eventually have only one way to go. For the Indian investor, this is not just a global story. India is a structural importer of almost every major commodity. We buy crude, gold, edible oil, and even coal from abroad. When global commodity prices are low, our import bill shrinks, inflation stays manageable, and the RBI has room to cut rates. That is good for your bond portfolio and your equity portfolio. But it also means that when commodity prices eventually turn, the tailwind for your existing holdings could become a headwind. Owning commodities directly is a hedge against that exact scenario. ## What Actually Counts as a Commodity Investment? Let’s clear the air on definitions. When we say commodities, we are not talking about futures trading with 10x leverage and a heart rate monitor. For a salaried investor, commodities fall into four broad buckets. ### 1. Precious Metals (Gold and Silver) The classic Indian favourite. Gold has cultural resonance, but it also has a low correlation to equity markets. Silver is more industrial, with demand coming from solar panels and electronics. ### 2. Energy (Crude Oil and Natural Gas) This is the most volatile bucket. It is also the most politically charged. You are essentially betting on global growth, OPEC decisions, and geopolitical risk, much like the dynamics explored in [how geopolitics and oil prices affect your Indian stocks](/finance/blog/how-geopolitics-and-oil-prices-affect-your-indian-stocks). ### 3. Industrial Metals (Copper, Aluminium, Zinc) These are the cyclical workhorses. Copper is often called Dr. Copper because it has a PhD in economics. It tends to rise when manufacturing is picking up and fall when it is not. ### 4. Agriculture (Wheat, Corn, Soybean) This is the most weather-dependent bucket. Monsoon failures in Brazil or frost in Argentina can move prices overnight. [Monsoon failures in India can similarly disrupt markets](/finance/blog/monsoon-woes-and-market-dips-how-weather-affects-indian-stocks), as the weather has a direct impact on agricultural output and related sectors. Here is a quick comparison of how these buckets have performed in the last decade versus the last year, just to give you a sense of the cycles: | Commodity Group | 10-Year Annualised Return | 1-Year Return (Approx.) | Current Valuation Signal | |-----------------|---------------------------|--------------------------|--------------------------| | Gold | 8.2% | 15% | Neutral to Expensive | | Crude Oil | 2.1% | 8% | Cheap | | Copper | 3.4% | 12% | Cheap | | Agriculture | 1.8% | 5% | Very Cheap | The pattern is clear. The stuff that has been boring for a decade is starting to stir, and it is still priced for a world where nobody wants it. ## How to Start Without Getting Burned The biggest mistake new commodity investors make is treating it like a stock trade. They buy a futures contract, the price moves 2 percent against them, and they panic. Commodities are volatile. A 20 percent drawdown in a single year is normal. That is why the entry vehicle matters more than the timing. Those who have navigated similar [market volatility](/finance/blog/market-volatility-survival-guide-tips-for-indian-retail-investors) know that a disciplined approach is crucial. ### Option A: Commodity ETFs (The Cleanest Route) Exchange-traded funds that track commodity indices are now widely available in India. You can buy them through your existing demat account, just like a stock. The key advantage is that you get broad exposure without worrying about expiry dates or margin calls. Look for funds that track the MCX Commodity Index or a global index like the S&P GSCI. These funds hold a basket of metals, energy, and agriculture, so you do not have to pick a single winner. ### Option B: Sovereign Gold Bonds (The Smarter Gold) If your interest is specifically in gold, skip the ETF and go for Sovereign Gold Bonds (SGBs). They pay you 2.5 percent interest per year on top of the gold price movement, and if you hold them till maturity, the capital gains are tax-free. That is strictly better than physical gold or a gold fund for a long-term investor. The only catch is that SGBs have a fixed issuance schedule, so you cannot buy them whenever you want. You have to wait for the RBI window. ### Option C: International Commodity Funds (For Diversification) If you have some exposure to US markets through platforms like Vested or INDmoney, you can look at broad commodity funds listed on US exchanges. These give you access to global pricing, which is sometimes more efficient than Indian commodity markets. This route also lets you hold commodities in dollars, which is a separate hedge against rupee depreciation. ## Our Take: What We Recommend We are not going to tell you to dump your equity SIPs and go all-in on copper. That would be reckless. But we do think there is a compelling case to allocate 5 to 10 percent of your portfolio to commodities over the next 12 to 18 months. Here is how we would do it if we were starting from scratch. First, put half of that allocation into gold, but only through Sovereign Gold Bonds. The current issue price is usually close to the market rate, and the 2.5 percent interest sweetens the deal. If you are in the 30 percent tax bracket, that interest is taxable, but the capital gains at maturity are not. That is a rare tax arbitrage you should use. Second, put a quarter into a broad commodity ETF like the Nippon India ETF Gold BeES if you want simplicity, or better, a multi-commodity ETF like the Kotak or ICICI Prudential options that track the MCX index. These have expense ratios under 0.5 percent and are liquid enough to exit without a huge spread. Third, keep the last quarter in cash, waiting for a pullback. Commodity prices are volatile, and there is a decent chance that crude oil or copper dips 5 to 7 percent in the next few months. When that happens, buy the dip. Do not try to catch a falling knife, but do not be afraid to step in when the fear is palpable. One final note. Do not use commodity futures. Ever. The leverage is seductive, but the tax treatment is messy (they are treated as speculative income, taxed at your slab rate with no indexation), and the risk of a margin call wiping out months of gains is real. Stick to ETFs and SGBs. They are boring, which is exactly what you want from an asset class that is otherwise anything but. ## The Timing Question You might be thinking, is now really the right time? Let’s look at the signals. The US Federal Reserve has started cutting rates, which weakens the dollar and makes dollar-denominated commodities cheaper for other countries to buy. China, the biggest consumer of industrial metals, is showing signs of stabilising after a brutal property downturn. And India, with its infrastructure push, is importing record amounts of steel and copper. These are not bullish signals individually, but together they create a floor under prices. The VanEck note we mentioned earlier made a sharper point. When commodity valuations are this low and ownership is this thin, even a modest improvement in demand can cause outsized price moves. Because nobody owns them, there is no selling pressure. The only way is up, and it does not take much to light the fuse. ## FAQ ### Are commodities a good hedge against inflation in India? Yes, but only over a full cycle. Commodities tend to rise when inflation is already spiking, which means they are a poor leading indicator. However, if you hold them for 5 years or more, they generally preserve purchasing power better than cash or bonds. For a salaried investor, they work best as a portfolio diversifier, not as a standalone inflation trade. ### What is the minimum amount needed to start investing in commodity ETFs? Most commodity ETFs in India trade in lots as small as one unit, which can cost anywhere from Rs 50 to Rs 500 depending on the fund. Practically, you should start with at least Rs 10,000 to Rs 15,000 so that brokerage and transaction costs do not eat into your returns. You can add to it monthly, just like an equity SIP. ### How are commodity ETF returns taxed in India? This is where many investors get caught. If you hold a commodity ETF for less than 36 months, any gain is added to your income and taxed at your slab rate. If you hold it for more than 36 months, it qualifies as a long-term capital gain and is taxed at 20 percent with indexation. That is higher than the 10 percent rate on long-term equity gains, so factor that into your expected returns. It is still worth doing, but you should hold for the long term to get the indexation benefit.

Commodities Investing India: Why Now, How to Start

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