Over the past one year Gold prices have zoomed up about 40%. To counter the price rampage, jewelers have come up with big incentives on their gold savings schemes, which have been in vogue for nearly a decade now. Whether it is national branded jeweler Tanishq, Delhi based P C Jewellers, Mumbai’s leading gold retailer Tribhovandas Bhimji Zaveri or Chennai’s GRT Jewellers, most jewellers have gold savings schemes running.
What’s the Gold Savings Scheme?
Gold jewellers typically offer two types of gold saving schemes:
First, deposit fixed amount every month for a fixed period with the jeweler. At the end of the period some bonus is added by jewelers and the total amount can be used to buy jewellery. The bonus amount is generally equivalent to one month’s installment for a one-year scheme and paid at the end of the scheme. Here, the saver ‘earns’ an effective return of 15% (compounded annually) on his savings.
The second option is to have the monthly installment invested immediately in gold, at the prevailing price. At the end of the installment period you can convert it into your favorite piece of jewellery.
These schemes also at times come with the promise of ‘zero’ wastage and lower making charges on the jewellery you purchase out of these savings.
How the Gold Saving Schemes work?
It works like an informal saving banks account.
Jewelers give a card or booklet (called passbook) which is updated with every deposit you make.
For payment, you must deposit a cheque every month or give post-dated cheques. Some jewellers also offer the ECS facility, where a fixed amount is automatically transferred from your account into their account.
Returns in Gold Saving Schemes?
The return in Gold saving scheme varies with the terms of each jewelers. If we consider Tanishq “11+1” Plan where you pay 11 installments while Tanishq pays the 12th installment, the returns are in the range of 17%. But the catch is these returns are nominal, you cannot cash it out, and you can use the amount to buy jewellery only.
Points of Caution:
Though 17% in the above calculation seems very attractive but you should also keep in mind the following points of caution:
- Unlike banks and NBFCs which are regulated by RBI, jewellers do not fall under the purview of any regulatory body. You may thus be left with limited recourse if you entrust large sums, especially to small time jewellers.
- The money can be used to buy only gold or diamond jewellery, not silver or gold coins, even bars.
- Under no circumstances there would be a cash refund.
- There might be a problem of buying a piece of jewellery that corresponds exactly with what you have accumulated in your savings scheme. If you are going to buy gold of a higher weight than the value of your savings, you will have to pay full wastage and making charges
- The bonus amount is only paid if you have completed payment of all the installments.
- There might be other hidden charges in the fine prints of the scheme.
- If the gold prices become volatile, small time jewelers may find it difficult to honor the claim.
Gold ETF/ MF – An Alternative?
Gold Saving Scheme may look in terms of returns but also have risks. The other option is to do a similar investment in Gold Mutual Fund or a Gold ETF.
Advantages of Gold ETF:
- You can invest in Gold ETF or MF in form of SIP and convert them to physical gold later. The returns are comparable to appreciation in physical gold.
- There is no boundation to buy jewellery only. You can en-cash your units for real cash.
- ETFs & MFs are currently considered more tax-efficient compared with gold jewellery
Gold Saving Scheme seems to be a good option for people who are looking to buy jewellery in near term (1 – 2 years) for some specific occasion like marriage, but keep in mind it’s not an investment. It’s at best a saving scheme for purchasing jewellery. Also you should be careful which jeweler to go with. You would want to stick with well known brands having a lot of option of jewellery to choose from.
On the other hand if you are looking for investing in Gold then Gold ETF, Gold Mutual Fund and e-gold is the best option in terms of taxation, safety and convenience.