Gold purchases are a major chunk of wedding expenses. With gold prices remaining high and showing few signs of coming down, various jewellers offer monthly saving schemes through which people can set aside funds for buying jewellery. We look into the merits of such schemes and if it makes sense to use them as an investment.
Gold saving schemes work like bank recurring deposits or RDs. The investor deposits a fixed sum every month with the jeweller for a certain period, usually a year, and at the end of the tenure gets a bonus, usually one or two instalment (s). The examples of these schemes include Tamanna by Gitanjali Jewels and Golden Harvest by Tanishq.
"These help consumers plan jewellery purchases. There is also the flexibility of purchase. With offers like these, women of all age and income levels can plan jewellery purchases. Our schemes endeavour to make purchase of gold jewellery easier for everyone," says Sandeep Kulhalli, vice president, marketing and retail, Jewellery Division, Titan Company Ltd.
To see how these schemes work, consider an example. A person deposits Rs 2,000 every month for 12 months and the jeweller pays an additional instalment. At the end of the tenure, he can buy jewellery worth Rs 26,000 (12*2,000= 24,000+2,000 = Rs 26,000). The gain percentage comes at 8.33%. Some jewellers, for instance PC Jewellers, pay two instalments as bonus, which amounts to a gain percentage of 16.67% for the investor. On the face of it, it's not a bad deal at all.
In some schemes, gold worth one instalment is credited to the investor's account at the end of the tenure, when he can buy jewellery equal to the gold accumulated. One example of such a scheme is Swaminidhi by Tanishq. It's a 12-month scheme under which the investor can opt for fixed/flexible payment options. In the flexible option, the investor can pay according to his convenience. However, in both cases, the minimum payment has to be Rs 2,000 per month. Additional instalments have to be in multiples of Rs 1,000. Now, imagine that a person starts investing in January 2014 and pays Rs 5,000 as the first instalment. If gold is at Rs 500 per gm, 10 gm will be credited to his account. Now, if next month he deposits Rs 10,000 and gold shoots up to Rs 550 per gm, his account will be credited with 18.18 gm gold. If after the end of one year he accumulates 100 gm gold in his account and prices rise to 600 per gm, he will be entitled to buy jewellery worth Rs 60,000 (100*600).
However, there is a catch here. He can buy only jewellery, whose price will include making charges as well. He will not get pure gold worth Rs 60,000. That is why such a scheme will work exceedingly well for investors if gold prices are rising. But if prices fall during the scheme's tenure, the investor will lose. The table, "In Difficult Times", shows that an investor in 2013 would have lost money. By investing Rs 5,000 per month from January to December, he would have put in Rs 60,000. However, on the basis of the gold price in December 2013, he could have bought jewellery worth just Rs 59,963 (20.62*2908).
Experts say these schemes don't make much sense as an investment. "These are not investment schemes. These are more like sales promotion schemes. The idea is to exploit people's basic need to buy jewellery," says Karthik Jhaveri, a Certified Financial Advisor.
CAN'T TAKE CASH BACK
These schemes don't give the option of taking cash instead of jewellery. You have to buy jewellery for the full amount even if you don't want to. No cash is paid even if you stop making payments mid-way. Also, jewellers deduct an administration charge in case of premature closure of the account. For instance, TBZ charges Rs 500 if the investor backs out after seven days of enrollment but before paying the third instalment. Investors have no option but to buy jewellery after paying the third instalment. Before that, they can get the cash back.
PAY FOR MAKING CHARGES
By making it easy for investors to buy gold, the jeweller is ensuring confirmed sales, on which he can charge a making fee, which can be arbitrarily decided and range from 9-30% of the value depending upon the design and brand. This reduces gains by a big margin. Investors can't opt for gold bars and coins on which making charges are much lower than on jewellery.
Subscribing to such a scheme also limits your negotiation power as you have to buy from the same jeweller even if some other is offering a better deal or design.
SHOULD YOU INVEST?
Gold prices fell in 2013 but are still around Rs 30,000 per 10 gm. So, if you are planning to buy jewellery, say, for your daughter's wedding or for gifting, it makes sense to opt for such schemes. "These schemes help investors who are not organised with their finances. This prevents them from making financial mistakes such as taking a loan, etc, for buying jewellery," says Jhaveri.
But those who are disciplined and want to invest in gold to benefit from the expected price rise should go for gold exchange-traded funds, or ETFs, offered by mutual funds, as they are more cost effective. Gold ETFs also offer more flexibility as one can invest any amount. Besides, one gets direct exposure to gold, without any making charges etc. "If somebody has a long-term view on gold and wants to save for, maybe, his daughter's wedding a few years down the line, ETFs are a low cost-alternative. The investor can sell the units at the prevailing gold price and buy jewellery from anywhere," says Suresh Sadagopan, an independent financial planner.
Also, in most gold saving schemes, investors buy gold at prices prevailing at the end of the tenure. They don't benefit if there is a fall in the price during the scheme's tenure. In ETFs, if the price falls, more units are credited to the investor's account, which he can redeem at the prevailing market price. Mutual funds also offer gold funds which invest in gold ETFs. In this, the investor can opt for a systematic investment plan.