Thursday, April 19, 2012
Are gold jewellery saving schemes worth it?
How do they work?
You invest a fixed amount every month for the chosen tenor and the jeweller adds a month’s instalment at the end; some jewellers even pay double the instalment. Once the tenor ends, you can buy gold worth the money collected from the same jeweller.
In Tare’s case, she can buy jewellery worth Rs. 24,000 (Rs. 2,000x11+Rs. 2,000) in October when her 11-month tenor gets over. We are assuming that you will check the purity of gold and will not get short-changed on the purity and quality of gold.
The customer can get a benefit of around 8.33-16.67% through these schemes. However, do note that the 16.67% benefit is available only with one jeweller, PC Jeweller. The company reinvests the amount in such a way that besides being able to meet the interest it needs to give to the customer, it gets to keep the additional returns it generates as profit. Says S. Subramaniam, chief financial officer, Titan Industries Ltd, the parent company of the jewellery business Tanishq, “The money we get from investors through the jewellery savings scheme is deposited by us in fixed deposits in banks (most of them nationalized banks) and is absolutely safe.”
Some jewellers use this money for operating expenses. Operating expense is an expense incurred in order to carry out a company’s normal business activities.
For those who do not have any other form of saving, this can work well since you buy an asset at the end of the term. Says Ashok Minawala, ex-chairman of All India Gems and Jewellery Trade Federation, “A majority of women in India still don’t have many options to invest either due to ignorance or lack of financial education. Holding liquid cash is a risk for them. Hence, a scheme like this can help them not only save money but also convert it into gold at the end of the tenor.”
Moreover, people who are looking to buy jewellery for marriage or other purposes, the schemes works well as it makes way for systematic investment.
The first limitation is that you can use the accumulated amount only to buy gold jewellery—not even gold bars or coins. So in case you need some accumulated money for an emergency at the end of the tenor, you won’t be able to use this money for the contingency. Here, the best you can do is sell the piece of jewellery you buy with the accumulated amount and forego the making charges part.
Compare this with recurring deposits, which currently return 8.25-9.25% per annum. The return is comparable with the benefit the schemes provide; moreover, there are no making charges to forego.
The second disadvantage is that the jewellery you purchase at the end of the tenor would be available at the prevailing market rates then.
Assume if the jeweller decides to buy gold at the prevailing market value with the money each month after receiving the contribution. If we go by last year’s data, had the company bought 10g of gold in January, the value of gold would have been up around 40% at the end of the 12th month.
So if you had bought gold coins worth the instalment amount every month yourself, your money would have grown by almost four times the returns most of these jewellery schemes offer.
Says Veer Sardesai, a Pune-based financial planner, “Through these schemes, the jewellers will try and compensate the additional money that they give as free instalment through making charges. That could be the reason why they put a clause that a customer can’t buy coins or bars under the scheme. One should clearly distinguish between investment and luxury when it comes to gold.”
What should you do?
If you are planning to get married in a couple of years and need some jewellery for the same or if you want to gift your daughter, wife or sister but don’t have a lump sum amount, then this scheme is for you. Here, do note that PC Jeweller gives a larger benefit than others; however, the limitations remain even in this case.
But if your purpose is pure investment, then stay away from such schemes as the making charges of the jewellery and fluctuating gold prices will eat into your returns. Remember that the making charges are entirely controlled by the jewellers. A simple recurring deposit will work better for you. However, if it is a means of entertainment for you and the joy of going each month to look at the piece you are going to buy overrides a financial decision: go right ahead.