Tuesday, November 13, 2012

Avoid Jewellers Gold Savings Scheme.... Here's why

Indians Love Gold!

Jewellery Houses like Tanishq, PC Jewellers and GRT Jewellers have been quick to latch on to this craze of Indians and have launched innovative Gold Savings Schemes to lure buyers. With as little as Rs.1000/- per month, you can save systematically with the jeweller for 11 months and the Jeweller will usually add a month's instalment FREE (some jeweller even pay two instalments) at the end of the saving period. 



Yes, depending on Jeweller and scheme, these schemes offer returns in the range of 8% to 18%.
So, in essence, these Jeweller Gold Saving Schemes are EMI in Reverse. They help you buy Jewellery at a Future Date by saving and accumalating.
Sounds good. Then, what's the catch? Why are Financial Experts suggesting you to avoid these Jeweller Gold Saving Schemes?

There are several reasons and let us look at them one by one and see the reasoning.
1. Almost every Jeweller offers you Gold only at the end of the Term and at that days price. This means you are more likely to get less Gold because of the Appreciation Factor.
Ex : If you are investing Rs.3000 on the 10th of every month to buy 10 grams of Gold at the end of the year and if the Gold price steadily goes up, then obviously you will left with less Gold and you will be forced to put extra money to buy your 10 gms Gold.
So, if say you started your instalments in January and the Gold price was 2800 per gram and at the completion of your instalments in November, the December price of Gold is 3000 per gram then you are forced to pay Rs.3000 per gram whereas the Jeweller would have bought at Rs.2800 per gram.
This drawback could be avoided if you investing through Gold Savings Schemes by Mutual Fund as the averaging works better. 

 2. Almost every Jeweller forces you to buy Gold Jewellery and does not give you Cash in return. Now, what this makes you, you are forced to pay Making Charges fo Jewellery and either you pay extra cash or buy less Gold.
In Mutual Fund gold Savings Schemes you are getting CASH and thus saved the igomy of paying Making Charges, etc.

3. The Gold Savings scheme by Jewellers do have SEBI approval and thus there is no monitoring of the cash you pay. These Jewellers may be using your fund for Working Capital, business, etc and nobody checks their books. So, if tomorrow, suddenly Gold price crashes and all Investors stop their instalments and ask for Gold, then you never know how many of these Jewellers would be able to keep their word.

In Mutual Fund Gold Savings Schemes, SEBI is mandatory. Their books are mandatory checked. All your funds/investments are backed by Physical Gold.

4. Very few Jewellers offer 24 Karat Gold. Almost every jeweller offers only 22k gold. So, since you will not get cash from the Jeweller, you are buying Gold which is not 100% pure.
In Mutual Fund Gold Savings Scheme, your funds are backed by 24k Pure Gold.

5. Resale value of Jewellery is lesser. Jewellery is not made of 24 Carat Gold and also carries making charges, resale value of Jewellery is much less compared to Gold coin/biscuits/Gold bars. Since you are forced to buy Jewellery and do get cash/gold coins from the Jewellery, you are again losing.
In Mutual Fund Gold Savings Scheme, since you paid cash, you can either reinvest or buy Gold Coins instead of Jewellery.

6. You have to buy from the Same Jeweller even if the Jeweller does not have designs of your choice.
In Mutual fund Gold Savings scheme, since you are paid cash in lieu of Gold, you can buy from Jeweller of your choice.

7. If at the end of the Instalment period, if you are in need of Cash for emergency, you wont be able to use this money as you are given only Jewellery. The best you can do is to sell the piece of Jewellery and forgo the making charges.
In Mutual Fund Gold Savings Scheme, you are paid cash always.

8. In Jeweller Gold Saving Scheme your Gold purchase attracts Wealth Tax and also Capital Gain Tax (if you sell within 3 years).
In Mutual Fund Gold Savings Scheme, there is no Wealth Tax and you are taxed for Long Term Capital Gains just after 1 year (in physical gold, you have to wait for 3 years).

Jewelers not only earn interest on the buyer's installment but also sell the jewelry after earning a handsome margin. For 20 grams gold jewelry, he earns Rs 600 making charge and sells 22 carat gold at rate of 24 carat gold. So he earns approx 8% extra by selling gold of 22 carat purity.
For jewelers, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer’s installment.
Some jewellers do offer "zero wastage" to lure gullible investors, but do note that these "zero" wastage if only for few select designs/pieces. INtricate desingner Jewellery could still see a higher levy.
For lower middle class people, and for people who want to accumulate Gold for marriage or other purposes in near future, the Jeweller Gold Saving Scheme looks okay, but for all other purposes, Mutual Gold Saving Scheme is the BEST.
If you are hell bent on investing in these schemes of Jewellers, then I feel that PC Jewellers and GRT are better among the Worst.

While you may argue, that since the Jeweller gives me 1 month instalment FREE and the returns works out to 15%, do note that the same investment in Gold Saving Scheme via SIP would have given you 27% return. Jewellers are not here for charity, they give FREE last instalment with money made from your previous instalments!
Purity is another matter of seriuos concern. Though the use of "hallmark" has reduced this malice, still it persists.
Indian households predominantly purchase gold in the form of jewellery. Gold Jewellery has aesthetic appeal and is widely used for ornamentation. Besides, investment in gold jewellery is also done for a special occasion such as a marriage, birth of a child etc. However, jewellery by itself has a major drawback - there is a loss of around 30% due to making and melting charges when you buy and sell.

WHAT I FEEL.................
Gold continues to be a non-productive asset and over long periods of time, returns from gold seldom beat returns from productive assets classes like equities. Unless you are an active investor who can spend a lot of time rebalancing your portfolio, I recommend an exposure of anywhere between 5 to 15% of your total assets in gold.
Gold ETFs or Gold Saving Schemes by Mutual Funds offer you the option of buying in monthly instalments which ensures that you buy Gold at various Price points thus averaging out your Purchase price.
If you really want to accumulate Gold through monthly instalments, the BEST option would be invest through Gold Savings scheme offered by Mutual Funds. This will also help you in averaging your instalments.

If you had invested Rs.100 in 1980 in both Gold and Equity (Sensex), the value of gold now would be Rs.1314 and that of Equity (Sensex) would be Rs.15600/-
The most important thing is the proper asset allocation.Both equity and gold mutual funds have a place in a portfolio.For long term investment equity mutual funds should form core of the portfolio with gold funds acting as a hedge to balance and add stability to the overall portfolio.So, invest in a gold fund once you have built a well diversified portfolio of equity mutual funds with 5 to 10% portfolio allocation to gold.
As has been pointed out often, gold is an unproductive asset. Unlike stocks or bonds, it's a type of asset where value depends on nothing but a shared belief that the value will rise and keep rising.

Most investors invest in Bank Recurring Deposits to buy Gold at a future date. This is not a good idea since Interest Rates may not keep pace with the rise in Gold price and they will not be able to achieve their objective.

Gold Jewellery Schemes aim is to give you Gold/Jewellery whereas gold Savings Funds/Gold ETFs aim to give you Cash.
So, if you want to buy Jewellery in the near future (say 1 year), then go for Jewellery Gold Savings Schemes, but if you want to buy Gold as an Investment or if your Gold usage is at a later date (say your daughter's marriage, which is several years away) , then its Gold Savings Fund/Gold ETF blindly.
Caveat, if it is for consumption, then unless you have a very trusted and reliable Jeweller (ready to buy back from you), dont think of these Gold Savings Schemes by Jewellery Stores.
Buy Gold ETF , Sell the Units when you want gold and from the money you get , go buy gold !

Happy Diwali and best of luck,
Srikanth Matrubai

Also visit http://equityadvise.blogspot.com


  1. Hi Srikanth,
    thanks for the warning/briefing. I partially agree with cash SIP for future gold purchase, but jewelers also offers another scheme "weight" scheme where you accumulate weight (gms) month on month i.e. you purchase .5, 1gm, 2gm etc month on month and at the end of 11th month for the accumulated gms, you can purchase the item equivalent to that grams, this is irrespective of the gold rate on that day

    Do you see any drawback on this?

    Also with MF, there may be lock in period


    1. There are 1000s of mutual funds which do not have Lock-in Period and many dont even have Exit loads

      Check with your Advisor

  2. Thanks for this great post, i find it very interesting and very well thought out and put together. I look forward to reading your work in the future. the closest pawn shop near me

  3. These types of jewelries are very popular as gift. If you are aware of these types, then you can easily find the perfect piece of charm bracelets for women or any kind of jewelry that you like. more information

  4. Well, that’s a good way to put it, nice insights, works great in clientele explanation and information resource option.

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  5. Very informative post. Thanks for Sharing with us. I think investing in Diamond Jewellery is better. These days a new trend in coming in the market, where you can choose Bridal Diamond Jewellery as an investment option. Some Diamond Jewellers, such as Eves24, provides Bridal benefit schemes in which you can buy the Wedding Jewellery and after marriage, you can get it exchanged for Party Wear Jewellery or Daily Wear Jewellery of similar price for daily use. They also offer complimentary reception jewellery.

  6. Very informative post. Thanks for sharing with us, but these days a new trend in coming in the market, where you can choose Bridal Diamond Jewellery as an investment option. Some Diamond Jewellers, such as Eves24, provides Bridal benefit schemes in which you can buy the Wedding Jewellery and after marriage, you can get it exchanged for Party Wear Jewellery or Daily Wear Jewellery of similar price for daily use. They also offer complimentary reception jewellery.

  7. Very informative post. Thanks for Sharing with us. I think investing in Diamond Jewellery is better. These days a new trend in coming in the market, where you can choose sell your gold online


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