As an asset class, commodity trading allows investors to participate in a highly leveraged market, with exponential profit potential. However, retail participation in commodity trading is limited. Mainly due to high margin requirement and secondly, because of the possibility of physical delivery of the asset. But the problem seems to be vanishing now as MCX readies to launch index futures, MCX ICOMDEX, in base metal which will allow both retail and institutional investors to invest in base metal as an asset class without worrying about possible delivery.
The Multi Commodity Exchange of India or MCX is the largest commodity bourse and plays a leading role in regulating the commodity trading market in the country. MCX has undertaken a task to modernize the Indian commodity market to compete in the global arena. In September, MCX announced that it is planning to launch the first base metal futures indices in the following month. Finally, from October 19, Retail and institutional investors will be able to invest in the future index.
To be called MCX iComdex base metals index future, it will contain futures contracts named MCX METLDEX. Initially, contracts expiring on November, December, and January 2021 will trade.
Earlier in August, the exchanged launched BULLDEX a bullion trading index on gold and silver which is currently clocking a turnover of Rs 250-300. Taking inspiration from its success, MCX has introduced its new index futures in base metals.
What is METLDEX?
METLDEX is expected to close the gap in the base metal trading market. The index will follow five base metals in the MCX platform – copper, zinc, aluminium, lead, and nickel to offer traders and investors with an opportunity to invest in base metals as a sector. The selection of the base metals in the index reflects the trading volume of each base metal in the Indian market, comprises – 33 percent zinc, 30 percent copper, 14 percent nickel, 13 percent lead, and 10 percent of aluminium.
One solution to many problems – the introduction of METLDEX will solve the biggest problem that has kept many retail and institutional investors at bay. With index investment, retail investors don’t have to worry about physical delivery of the goods. Simultaneously, it will allow institutional investors to allocate funds through PMS, MF route, and even including it in the ETF to build new products for their clients.
It is better than investing individual metals, requires less margin than investing in underlying commodities. After gauging initial reaction in the market, MCX plans to launch far dated futures contracts as well as options on these contracts to enable the offering of more sophisticated products.
MCX received SEBI approval in June and has already conducted mock trading. Trading in the index will start from October 19. With more than 60 percent allocation on copper and zinc, the index successfully targets ‘long only’ participants.
Commodity-linked products help with portfolio diversification. MCX ICOMDEX will give more options to portfolio managers to build modern products for clients. It is the right product at the right time and a bold step towards maturing the Indian commodity market.