Are jewellery saving schemes a good investment option? ::Business Line

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If you haven't saved enough money to buy expensive jewellery, should you go in for a gold savings scheme instead?

Whether it is national branded jeweller Tanishq, Mumbai's leading gold retailer Tribhovandas Bhimji Zaveri or Chennai's GRT Jewellers, most jewellers have gold savings schemes running. Are these a good investment option?

They are a good way to fund your gold jewellery purchases but do be aware of the following points. First, unlike gold funds where the returns can rise with higher gold prices, most gold saving schemes of jewellers offer you a fixed value of gold jewellery at the end of the term.

This makes these schemes unattractive when gold prices move up. Second, these schemes allow you only to buy jewellery, that too from the same jeweller at the end of the term. You cannot redeem your investments in cash. Three, on safety, these schemes are not like bank deposits.

What is the promise?

Gold jewellers typically offer two types of gold saving schemes. One is the option to save a flat amount every month for a fixed period. At the end of the period the customer gets to convert the money into equivalent value of jewellery.

The second option is to have the monthly instalment invested immediately in gold, at the prevailing price. At the end of the instalment period you can convert it into your favourite piece of jewellery.

Now, what are the pros and cons of each? In the first type of scheme jewellers offer a bonus amount to the customer at the end of the instalment period. The bonus amount is generally equivalent to one month's instalment for a one-year scheme and paid at the end of the scheme. Here, the saver ‘earns' an effective return of 15 per cent (compounded annually) on his savings. But do note that this ‘return' will never come to you, as you will only exchange the accumulated sum for a piece of jewellery.

There could also be the promise of ‘zero' wastage and lower making charges on the jewellery you purchase out of these savings.

But gold savings schemes usually come with fine print that states that the ‘zero' making charge claim is valid only on select pieces. Intricate designer jewellery may see a higher levy. Now, wastage and making charges can substantially reduce the amount of gold one can buy for a particular ‘investment', ranging typically at 20-25 per cent of value.

There is also the 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. Then, to avail of the bonus amount, one should have completed payment of all the instalments. If he stops in between he forgoes the bonus.Finally, if gold prices head northwards while you are in the scheme you will stand to lose, as you will be swapping your savings for jewellery at the then prevailing price.If you opt for the second scheme, where you buy a certain grammage of gold every month, you circumvent the above risk. But these schemes do not normally carry the ‘bonus' advantage and benefits such as zero making charges.

How do returns compare?

So, should you use gold savings schemes from jewellers to ‘invest' in gold? No, as gold funds may be a better option if you want to encash your investment.

A gold savings scheme with a monthly instalment of Rs 5,000 for 12 months where the jeweller gives one month instalment as bonus together with the accumulated sum on the 13{+t}{+h} month, leads to an annualised return of 15 per cent (returns are calculated discounting for the present value of cash outflows and the inflow at the end of the term).

Returns may however vary depending on the conditions of the specific scheme and the bonus promised.

An SIP (systematic-investment-plan) in a gold fund on the other hand will help you average the purchase price of gold and also give a price-linked return.

An investment of a similar Rs 5, 000 every month in gold exchange traded funds (ETF) last year would have given a return of 27 per cent.

The three-year compounded annual return of gold funds is 20 per cent.

Jewellers make up for the bonus paid to customers by accumulating gold even as customers pay for it.

The last decade has been good for the yellow metal with price rallying up.

But, what if the price of gold corrects? Jewellers without a back-up plan may be put in a tight spot.

Though one may argue that jewellery saving schemes give higher returns compared to banks whose recurring deposits give a return of 9-9.5 per cent, that comparison is quite incorrect due to the unequal risks involved.

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 Reserve Bank of India is however said to be mulling over bringing such schemes under its purview, on the mushrooming of these schemes in the market.