India is the second largest gold consumer in the world. From jewellery to bullion, Indians prefer to invest in gold. After all, gold acts as a hedge against inflation, market volatility, and geopolitical uncertainty. In this context, gold-saving schemes or installment plans offered by many jewellery retailers in India allow investors to invest in gold and smaller investors with jewellers offering schemes as low as Rs 500 to Rs 1000 per month. Many gold schemes floated by jewellers are worth buying but it depends on a complete analysis of the retailer and the scheme.
“For example, there are plans such as paying for 11 months and the jeweller pays for the 12th installment. This means jewellers give you an option of paying equated monthly installments for eleven months and the twelfth-month installment would be paid by the jeweller. The consumer can buy jewellery for the funds collected over 12 months. Our estimate suggests almost one-third of any jeweller's business is through these schemes,” says Sachin Jain, Regional CEO, India, World Gold Council.
Such schemes make it easier and more affordable for people to buy gold. “We advise consumers to do proper checks of retailers before investing in such schemes as we have seen instances where consumers have lost their savings to fly-by-night retailers,” says Jain.
However, these plans come with a catch. As mentioned, generally, jewellers will waive the last installment, proudly announcing that they will pay it for you. The idea is that at the end of your tenure, you can buy jewellery of the same weight or more by adding your funds.
“These plans do not make sense but only benefit the jeweller. They get advance money for a purchase that will happen in the future,” says Madhupam Krishna, Sebi registered investment advisor (RIA) and chief planner at WealthWisher Financial Planner and Advisors.
When you purchase gold jewellery you likely delay it till the next personal event or festival. Sometimes you want to buy jewellery more costly than your balance. So, you wait till you have more money to add. All these procrastinated buying decisions will help the jeweller.
“The waiving of the last installment is also a gimmick. Jewellers invest your monthly installments and recover that money. Remember they are traders of gold also. They buy and sell in commodity exchange to hedge gold prices. So even if the gold price falls, they can make money,” says Krishna.
In case you want to buy jewellery to use from your favourite retailer in a year’s time, these schemes make sense, if it is for three or more years, then they do not. Investing your money in an equity mutual fund and using the proceeds to buy gold would make more sense.
Now come to more practical aspects of considering them as investments. These schemes lack safety, liquidity, and tax benefits.
Further, Krishna adds that the Reserve Bank of India (RBI) or any regulator does not monitor such schemes. These may be run by jewellers of repute or maybe your local jeweller. What if it closes or shifts business to another part of the town?
Also, you get physical gold only. We all know it is vulnerable to theft or misplacing. There is no option to get cash or gold in financial (units or bonds) form.
Also, your installments are not refunded at any cost. You will only get gold jewellery which the jeweller is making. Whether you like it or not, need it or not, satisfied with quality and design or not - you must buy it. You do not have the option to get your money back and buy from another jeweller.
“When you are buying on your own you can always take the benefits of volatility. The same EMI can be done in MFs and when gold prices are correct you can buy more quantities. This freedom is not there in gold installment schemes,” says Krishna.
With increased options like gold funds, gold ETFs, and Sovereign Gold Bonds (SGBs), it also makes sense to adopt these new ways. ETFs free you from safekeeping and convert your investment to cash by redeeming your investment the way you sell your MF units or shares.
One can also get benefits of tax by investing in SGB. Gold investment in SGB if kept till maturity (eight years) is tax-free whereas physical gold selling attracts capital gain taxes. You also need to report physical gold purchases in your ITR.
So, look at these gold investment schemes with care. The free installment gimmick is not worth it.
