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For ages, Indian retail investors had a small world where they could invest their money: bonds, small savings schemes, public provident find and mutual funds. For the smart investor, equities provided an avenue that included products like futures and options. That's where it ended. But many Indian markets are still unfolding and investors have suddenly got another frontier to cross as commodity exchanges are now selling products that a small investor could consider.

In the boondocks of India, agricultural commodity trading was an activity that was closely associated with commodity traders. For urban investors like Pankaj Modi, who works for a stockbroking outfit, it was akin to rocket science. It was an activity that thrived among a cabal of close-knit traders.

But even as the equity markets were evolving fast with shorter settlement cycles, products like derivatives were getting popular with smart investors. In short, screen-based trading with its USP of transparency helped investors gain confidence.

It was time then that commodity bourses fell in line with their peers. Until recently, the commodity bourses had trailed far behind the stock exchanges in terms of technology, transparency, ease of trade and traded volumes. But times have changed.

The arrival of Multi-Commodity Exchange, National Commodity & Derivatives Exchange (NCDEX) and National Multi-Commodity Exchange of India has altered the scene.

Even as investors try to absorb this opportunity, scores of stock brokerages affiliated to NSE and BSE are diversifying into commodity trading. Brokerages, having made a name in stockbroking, are catering to the nascent market of electronically-traded commodities, where trades can be stored in demat.

ShareKhan Commodities, Sunidhi Commodities, ICICI COMM Trade, Kotak Commodity Services, Refco Commodities are a few of the affiliates of prominent stock brokerages that are setting up services in the commodity sector.

ICICI Direct and ShareKhan made waves in the investor world when they offered online internet trading services. Investors could log on to the website and punch in buy and sell orders for stocks, payment instructions to banks and delivery instructions to depositories.

“We’ll be following a similar plan for our commodity brokerage business like we did for our stockbroking outfit,' an ICICI COMM Trade official said. The target segment for ICICI Comm Trade, which will start operations shortly, are retail investors.

Ashok Mittal, in charge of ShareKhan Commodities, says the risk-reward ratio for commodities is better than other investments. “Commodities are less volatile than stocks,” he said.

The basic tenet for this market is to offer tools to hedge risks associated with commodities, which are prone to demand and supply imbalances over time.

Screen-based trading allows farmers to plan their crop and also time their transactions. In the coming months, as commodity exchanges take to the road to educate investors on the new opportunity, even equity investors can take positions and hedge their bets.

A weak monsoon could mean that FMCG companies may get it on their chin, as rural markets contribute almost half of their sales income. Correspondingly, farm produce would get better prices and taking an exposure in commodities like cotton during such times could get an investor some gains.

Manish Shah, head of retail products at Motilal Oswal, however, warns that only well-informed investors should take a shot at commodity trading.

“I don't think they should jump into commodity trading without knowing the intricacies of commodities,” Shah warns.

Shah’s view echoes what Seth Klarman of Baupost Group once said: “Smart investors stick to investments within their circle of competence, with which they are comfortable, whose businesses they have capability to understand.”

Madan Sabnavis, chief economist and head of knowledge management at NCDEX, says research findings have revealed that commodities are less volatile than equities and thus less risky. Sabnavis adds a caveat: “Commodity price risk exposure can do damage.” NCDEX is promoted by ICICI Bank, Crisil and National Stock Exchange, among others.

A recent research report by HSBC said that in four of the last 15 years, growth slipped by at least 10 per cent. If the current fears over the monsoon are justified, 2004-05 would be the fifth bad year in the last 15 years.

Investors like Modi, who are fleet-footed, are eyeing guar seed. This is a crop grown in Rajasthan. It is showing a lot of volatility and volumes have been skyrocketing ever since a bad monsoon started doing the rounds. But he is aware that he could get his fingers singed if he tried to wade into the counter. He is waiting and understanding the market.

Modi and hordes of other small investors are sniffing their way to the opportunities unfolding in the commodity markets in India, which players say will overtake stock exchanges in turnover within a few years.