The Role of Commodities in Stock Market Diversification
Introduction: Why Commodities Ought to Get Your Attention
Stock market investing is thrilling, until it's hit with volatility. Fear follows. That's where commodities can be the best friend of your portfolio. They do not act like ordinary stocks. So whereas equity may decline, commodities such as gold or silver may increase. That equilibrium enables you to weather market storms. And hey, if you're just starting out with all this — learning it from professionals directly makes a big difference. That's why we always recommend beginning from a stock market training institute in Deccan where they train real-world asset mix strategies, not textbook theory.
What Are Commodities in Financial Terms
Commodities are physical or raw materials utilized in day-to-day production and consumption. They're exchangeable on exchanges like MCX in India.
They are:
- Metals – Gold, Silver, Copper
- Energy – Crude Oil, Natural Gas
- Agricultural – Wheat, Cotton, Sugar
- Others – Steel, Aluminium, Rubber
You're not investing in a company here — you're investing in world demand-supply.
Why Diversification is So Important
Diversification means you don't keep all eggs in one basket.
Why it matters:
- When equity crashes, gold may rise.
- When oil prices go up, oil-related commodity funds gain.
- Even in geopolitical tensions, some commodities soar while stocks plunge.
So, commodities provide a risk cushion to your overall investment.
Commodities and Their Roles
Gold & Precious Metals
Gold is a haven asset. It is purchased during panic in markets.
Example: During COVID crash (March 2020), Nifty dropped 30%, Gold increased 13%.
Crude Oil & Energy
Energy influences inflation & economy.
Crude prices up = inflation = equities down.
But crude ETFs or energy companies can gain.
Industrial Metals
Copper, Aluminium are reflective of industrial demand.
Strong in growth. Weak during global slowdown.
Agricultural Commodities
Wheat, soybean, sugar are included.
Weather and very volatile.
Good for short-term tactical diversification.
How Commodities Behave in Market Crises
In most Indian and international financial crises:
- Stocks plummeted.
- Commodities such as gold and silver stood firm.
2008 Crisis: Gold rose as the markets plummeted.
2020 Lockdown: Crude crashed but then boomed as the recovery began.
Bottom line: Commodities respond differently, bringing balance.
Commodities vs Stocks: What Happens During Inflation?
Inflation nibbles at your returns.
Stocks: Can suffer due to high costs.
Commodities: Gain from inflation (particularly gold, silver, oil).
In India, when inflation goes up:
- Gold price tends to increase
- Metal ETFs become more popular
- Investors invest money in hard assets to overcome inflation
Real Indian Examples of Diversification Impact
Case 1 – Mr. Kulkarni (Nashik)
2022: He had 100% equity. When Nifty dropped 15%, his portfolio dropped ₹3.5L in 2 months.
2023: He diversified with 20% gold ETF. Next market downturn? Loss was just ₹1.9L. Gold balance saved the day!
Case 2 – Mrs. Sharma (Nagpur Teacher)
She added silver ETF + crude commodity fund to her retirement plan. It reduced equity volatility and provided consistent growth.
How to Invest in Commodities in India
Physical
Buy gold/jewellery coins, jewellery
Not highly liquid or secure
Digital
Gold ETFs, Sovereign Gold Bonds (SGBs)
Traded like stocks — simple, safe
Commodity Mutual Funds
Invest in gold, energy, or agri baskets
Forex Trading (Advanced)
Trade commodity futures on MCX
Very volatile — for advanced traders only
Key Risks with Commodity Investing
- High volatility (crude can fluctuate ₹500 in a day)
- Geopolitical events influence global commodity prices
- Timing is important — long-term returns may trail equity
- Storage & purity concerns (in physical gold)
Which is why always know why you are investing in a commodity — not simply because "gold is popular."
Common New Investor Mistakes
- Overloading portfolio with gold alone
- Trading futures without stop-loss
- Not taking into account taxation (gold also has capital gain tax)
- Not balancing between equity, debt, and commodities
Balancing smartly means diversification — not substituting equity entirely!
Conclusion: Plan, Don't Panic
Commodities won't get you super-rich overnight… but they'll rescue your portfolio in turbulent markets.
Next time someone tells you, "Only stocks yield returns," just ask them — "What about stability in crisis?"
Do not want to know how to plan diversification in real with expert advice?
Start with the stock market training institute pune and construct your portfolio with true logic and correct strategy.
Because investing is not just about "returns", it's about "resilience."
Disclaimer
This blog is for educational purposes only. It is not a professional financial advisory. Always consult a SEBI-registered advisor prior to investment. All investments are risky. Past performance is not indicative of future performance.
FAQs
Q1. How much should I invest in commodities?
5–15% of overall portfolio. Too much makes it volatile. Too little gives no stability.
Q2. Is gold better than equity?
Not better, but complementary. Gold adds protection, equity adds growth.
Q3. What's the safest way to invest in commodities?
Gold ETFs and Sovereign Gold Bonds — regulated, liquid, and tax-efficient.
Q4. Can I invest via SIP in commodities?
Yes! Several fund houses provide gold ETF SIPs and mutual funds based on commodities.