“ The desire for gold is the most universal and deeply rooted commercial instinct of the human race. ” — Gerald M. Loeb
Gold, never fails to entice its buyers, with its sheen and glitter. We Indians, are the largest consumers of gold in the world, with a holding of around 20,000 tons! Indian housewives are estimated to hold 11% of the world’s gold, which is equal to a whopping $600 billion!
Most of the gold held by us, are in the form of jewelry. Jewelry, being easy to adorn and display, creates a sense of well-being and provides a sense of security, that a physical asset can provide. Unfortunately, it adds very little value to your investment portfolio.
Though, gold jewelry is not at all an ideal investment, sometimes it becomes a necessity to purchase gold jewelry to meet cultural and social obligations. Gold jewelry is an essential purchase, on many occasions (Akshaya Tritiya) and especially on weddings.
Cashing on the sentiments of the people, most jewelers offer various types of gold jewelry purchase schemes. The schemes are typical monthly payment schemes, which run for a fixed tenure set by the jeweler. Such schemes claim to offer various benefits, ranging from providing a discount on the purchase, to waiver of VAT, making charges and wastage charges and to issuing bonus at the end of the tenure.
These schemes seem like an attractive option to save money, to utilize for jewelry purchase only. But are the gold purchase schemes worth its weight? NO!
Gold Purchase Schemes offered by Jewelers
Let us understand some of the types of gold purchase schemes floated by leading jewelers.
- Discount on Gold Purchase – Under this, you have to pay a fixed monthly amount to the jeweler, for a fixed term. At the end of the tenure, you can purchase jewelry worth the total amount paid by you, on which a discount of 40%-100% of the monthly fixed amount, would be applied.
- Gold booking Schemes – In this, you can book gold every month, by paying flexible monthly payments for a minimum specified term. The jeweler will buy gold against your name, and at the end of the term, you have to purchase jewelry from him, by paying additional making and wastage charges.
- Free Gold on enrollment–In this, you have to make a fixed monthly payment to the jeweler, who will buy gold at the prevailing rates. At the end of the tenure, the jeweler adds a small amount of gold to the total gold held by you, as promised during enrollment.
- Waiver of Making Charges/ VAT/Wastage Charges–You have to pay a monthly fixed/flexible payment to the jeweler. At the end of the tenure, you can buy jewelry, within the choices given by the jeweler, with a waiver of making charges, or VAT, or wastage charges.
- Bonus at the end of tenure – In this, you have to pay a monthly fixed amount, for a tenure fixed by the jeweler. At the end of the term, he adds a bonus amount equal to the monthly amount. You can buy jewelry for the total accumulated amount.
Though the offers seem beneficial to you, in actual they are NOT. Let us know why.
The accumulated amount/gold has to be used for jewelry purchase only
At the end of tenure, you have to buy jewelry compulsorily, and purchase of gold bars or coins is generally not allowed. If the scheme is a fixed amount scheme,you can buy jewelry, whose price includes making and wastage charges as well.
If the scheme is a gold booking scheme, your piece jewelry should weigh greater than or equal to the gold you have booked. You also have to pay making and wastage charges, additionally.
Limited Options for Jewelry Purchase
If you have opted for a scheme which promises waiver of making or wastage charges, then the jeweler will give you limited options to choose from the designs. Intricate designs, which results in more effort and wastage are not included in such schemes.
Additional Charges for Diamonds and Precious Stones
Since the schemes are meant for gold purchase only, if you buy any jewelry studded with precious stones and diamonds, you have to pay separately for them.
Lesser monthly payments may not be sufficient to buy a decent piece of jewelry
The minimum amount of monthly payments, for gold purchase schemes are roughly around Rs.2000 and gold is hovering at around Rs.2,800 levels currently. Assuming a 12-month tenure, you would have accumulated Rs.24,000, which may buy you around 8.3 gms of gold, which is hardly sufficient to buy a decent piece of Indian jewelry. You also, have to either bear the additional making and wastage charges, or opt for jewelry with lesser weight.
Gold Purchase Schemes are similar to other money saving schemes
These schemes are marketed to believe that, they provide enormous benefits to the customer is doling out freebies like bonus, gold or cost waivers. While in actuality, they are just passing on a part of the returns generated, to you. Just like an RD, which would pay you interest at the end of the term, the jeweler passes on a small benefit to you. The RDs deposited in banks, are comparatively safer that such schemes, as you would not be aware of the financial standing of the jeweler. He might shut down operations and default, on all the payments made.
You cannot get a refund or redeem the payments made in cash
Jewelers won’t give you a refund of the amount you have paid, in cash, or allow you to redeem it before the specified term. No matter how much small the amount is, you have to buy jewelry from him!
You have to buy jewelry at future price of gold
For all gold savings schemes except the gold booking schemes, you have to buy jewelry at the future price. Even though, you are making monthly payments with the sole intention of buying gold, you cannot benefit from cost-averaging during the payment tenure. You have no option, but to buy jewelry at the prevailing gold price, at the end of the tenure.
Risk of default by the jeweler and no buyer protection policy
These schemes are completely run by the jewelers alone and not recognized by RBI or any government body. Unlike banks or NBFCs (Non-Banking Finance Companies), no regulations are specified for these schemes, and in case, the jeweler just shuts shop, and defaults on your payments, there are no special laws to ensure your capital protection.
Bonus given by the jewelers, under jewelry purchase schemes are actually, illegal
By RBI rules, no companies other than banks and NBFCs are permitted to collect deposits from people, and issue bonus or interest. Though the major jewelers have stopped such bonus issue schemes, it is still run by many small jewelry business owners. You might be at great risk and lose you money, if you subscribe for such schemes by small jewelers.
Best Gold Buying Options – Comparison
If jewelry purchase schemes are not worthwhile, what is the best way to buy Gold Jewelry? Let us have a look at alternative options. (You may click on the below image to open it in a new browser window)
Gold ETF–Gold Exchange Traded Funds (ETFs) are offered by Mutual Funds and are more cost-effective. They offer more flexibility and enables you to make direct investments in gold, as each ETF unit is linked to 1 gm or 0.5 gm of gold. You can benefit from cost-averaging, without holding the gold physically. (Read : ‘What are Index Funds? Index Funds Vs ETFs‘)
Gold Mutual Funds – You can also invest in Gold Mutual Funds which invest in Gold ETFs. These funds invest in gold mining and trading companies and ETFs. You can invest a lump sum or start a SIP in this.
Sovereign Gold Bonds–These bonds are issued by the government, and the returns are linked to the price of gold. It also carries a fixed interest rate of 2.5% per annum. (Read : ‘Sovereign Gold Bonds – Features & Review‘)
Equity Mutual Funds–If your jewelry purchase goal, is quite a few years away & you have adequate risk appetite then you can try investing in equity MFs. Over the long term, Since equities have given a return higher than that of gold, you can aim to accomplish your jewelry purchase goal much earlier than you intended. (Read : ‘Best Equity Mutual Fund Schemes‘)
As you can observe, the gold jewelry purchase schemes have several disadvantages. If you have a gold jewelry purchase goal, it is better to consider alternative investment options mentioned above. These options not only ensure the safety of your investment and provide easy holding, but provides several advantages like,
- Option to purchase jewelry from various designers.
- You can negotiate on the making and wastage charges with the jewelers, as you have enough funds in hand, on redeeming the alternate investments.
- If you invest in other options, keeping in mind the total cost of jewelry purchase, the additional costs of making and wastage, should not be a concern for you.
This is a guest post by Kishorkumar of Mymoneysage.
About the Author / Company
KishorKumar Balpalli – Kishor is the founder of mymoneysage.in. He believes that financial literacy and discipline is the key to one’s financial freedom. Mymoneysage.in is an award winning personal finance platform, which helps you aggregate all your personal finance accounts like FD, Equity, Mutual Funds, PPF EPF, Credit Cards, Loans etc. Its one place where you can track, plan and invest seamlessly. Mymoneysage.in empowers you to invest in zero commission direct plans of mutual funds thereby helping you generate higher return on investments when compared to Regular Plans.
Continue reading other interesting articles written by dear Kishor :
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(Image courtesy of Master isolated images at FreeDigitalPhotos.net) (Post first published on : 17-April-2017)