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The world is witnessing a newtrend wherein developing countrieslike India, China, Brazil & other emerging markets are driving theglobal economy with their rising domestic consumption patterns.This sustained increase in consumption has led to investmentanalysts realizingthegrowthpotentialof a newasset class namelyCommodities.

Commodities are raw materials that are used to createconsumption related products, right from food to furniture topetroleum. The table below gives a snapshot of the broadcommoditysectors andtheirconstituents:

Commodities have also evolved as an asset class with thedevelopment of various commodity future indices. Theperformance of commodities as an asset class is usuallymeasured by the returns on a commodity index, such as theRogers International Commodity Index (RICI), which tracks thereturn in 36 different commodity products. In the last 9 years, theRICI Index has given compounded annualized returns of 18.31%as compared to 17.22% returns given by BSE SENSEX (Source :Bloombergas on31st March2008)

Benefits ofCommodityasan Asset Class

a) Strong Performance Track Record: The table alongsidereflects positive performance of RICI Index during falling &rising market phases. In fact, the RICI INDEX has

outperformedall otherindices since1999.

WhatareCommodities?

Note: RICIIndex- TheRogers InternationalCommodity Index is actingas a proxy forcommodityasset class.All abovereturns arein INRandin absoluteterms

(Source: Bloomberg as on 23rd April 2008)

b) Portfolio Diversification: Adding commodities to yourinvestment portfolio helps you take advantage of the benefitof diversification. In a diversifiedportfolio, assets do notmovein sync with each other, as commodities exhibit low/ negativecorrelation with respect to equity and bonds. Low/ negative

correlation means commodities can play an important role inportfolio diversification by reducing overall portfolio risk. Thisshould improve theconsistencyof returns over time.

Correlation coefficients of RICI Index (Commodities) with

respect toEquitiesandBonds

Note: CRISIL Fund~dx which tracks debt mutual fund returns has been used torepresent bond asset class, while BSE Sensex has been used to represent equityassetclass

(Source:Bloomberg& CrisilInvestment Manager)

c) Inflation Hedge: Commodities tend to react to changingeconomic fundamentals in ways that are different fromtraditional financial assets. For example, commodities areone of the few asset classes that tend to benefit from risinginflation. As demand for goods and services increases, theprice of those goods and services usually rises as well, so dothe prices of the commodities that are used to produce thosegoods and services. Since commodity prices usually risewhen inflation is accelerating, investing in commodities mayprovide portfolios with a hedge against inflation. As shown inthe table overleaf, commodity has a positive sensitivity to

inflationas compared toassetclasses like stocksand bonds.

CommoditySectors Constituents

Agriculture Grains, Vegetable oils, Fertilizers, Cropprotection,Genomics

Metals& Materials BaseMetals: Aluminum, Copper, Nickel,Zinc,Tin

Bulk Commodities: Iron Ore, CokingCoal,Bauxite Steel

Others: Soda Ash, Chemicals, RareEarthMetals

Precious Metals& Gold,Silver, Platinum, PalladiumMaterials

Energy Crude Oil, Natural Gas, Refining,Integrated Energy, Thermal Coal,

AlternateEnergy

Services Oil Services, Mining Services andOthers

Correlation

Coefficient 1999 2000 2001 2002 2003 2004 2005 2006 2007

Equity -0.04 -0.08 -0.16 0.06 0.002 -0.08 0.13 0.21 0.09

Bond 0.14 0.09 -0.12 -0.04 -0.02 -0.07 0.01 0.03 -0.02

COMMODITY BASICS

Knowledge Series - I

Indices Flat Rising Year to Since

Market Market Market Date 1999

(2000- 2002 (2003- (1999-

2001) 2007) till date)

SENSEX -34.55% 4.04% 490.68% -17.32% 443.94%

MSCI Emerging

Markets -28.06% -8.55% 249.98% -3.23% 274.04%

MSCI APAC

ex-Japan -27.57% -8.12% 181.81% -7.09% 162.32%

MSCI WORLD -22.13% -21.00% 73.74% -4.02% 31.50%

RICI INDEX 13.50% 33.26% 109.90% 20.16% 454.83%

Falling

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InflationSensitivity

Stocks : S&P500, Bonds : LehmanAggregateBond Index, RogersInternational Commodity Index

Date 31.12.1999 - 31.12.2007Source: MiraeAsset MAPS

d) Role ofCommodities inOptimizing PortfolioReturns

An exposure to commodities in your portfolio can help youoptimize its returns considerably. The graph below indicateshow with a prudent mix of commodity and SENSEX stocks ina portfolio, one could enhance portfolio returns while at thesametimereducing the volatilityof investments.

(Source:Bloomberg, data calculated from 1stJan1999to 11th Apr2008)

Investingin commodities - Routes

Traditionally in India, investor exposure to commodities hasbeen through futures trading. However, offering commodityexposure to investors through popular platforms like mutualfunds which invest in commodity stocks is the way forward.Exposure to commodity stocks through mutual funds offers

investors the prospects of achieving gains similar to thatpossible from direct exposure to commodities. This isconsidering that commodity stock prices generally move in linewith commodity indices which track physical commodities asshown in the graph below.

Source: Bloomberg, Data as on 1st Jan 2000 to 9th April 2008* NAV rebased to 100

RisksassociatedwithCommodityInvesting

While the positives associated with commodities are many,commodity markets are susceptible to volatility with changingdemand supply dynamics causing variation in commodityprices. Also climatic aspects like floods, droughts, etc. andother factors like competition, acreage & yields, geopoliticalconsiderations, etc. could impact the performance ofcommodities as an asset class. As such it is important thateffective risk management and risk modelling methods arefollowed while investingin this avenue.

In sum...

Commodities area distinct asset class with returns that are largelyindependent of equity and bond returns. Therefore, taking broadcommodity exposure can help in portfolio diversification, loweringrisk and potentially boosting returns. According to estimates fromBarclays Capital Research, total assets held by institutionalinvestorsglobally amount to US$50 trillion while direct commodityinvestments are miniscule at US$120 billion, i.e. less than onepercent of the global investment portfolio. With long termfundamentals of commodity companies appearing bright giventhe supply demand mismatch, rapid industrialization of emergingeconomies & emphasis on infrastructure development in manydeveloping economies, we believe commodity as an asset classdeservesa lotmore weightagein anyinvestor'sportfolio.

Monthly

Quarterly

Semi-Annually

Annually

Stocks Bonds Commodity

0.09

0.28

0.43

0.49

-0.10 -0.10

-0.19 -0.30

-0.04 -0.53

-0.02 -0.03

Disclaimer:

Mirae Asset KnowledgeAcademy (MAKA)is established foreducating investorson themacroeconomy,micro economy, stock markets, different factors affectingeconomy and impart knowledge to investors on the pros-cons of investing into stock markets. While such publications are believed to be reliable, the informationcontainedherein hasbeen obtained fromsources publishedby third parties. Theinformation in no wayexpresses an offer to subscribeto theunitsof theschemesof Mirae Asset Mutual Fund. Investors are advised to consult their financial advisors before contemplating investment in Commodities/ Commodity stocks, etc.Nothing contained herein shall be construed as granting the recipient whether directly or indirectly or by implication, any license or right, under any copy right orintellectual property rightsto usethe informationherein.

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Drashti Investments

09221890056

Drashti.Investments@rediffmail.com