Jewellers’ Gold Saving Scheme v/s GOLD ETFs Which is better?

Jewellers’ Gold Saving Scheme  v/s  GOLD ETFs

Which is better?

Background

The festive season has hit India with Navratri to be followed by Diwali. We Indians are famous for our passion and fascination for gold. Gold is quoting around Rs 32000 per 10 gram even then many individuals are lining up to buy gold on auspicious occasions like Dasera and Dhanteras. We never miss those days which are traditionally auspicious to buy gold. Many people accumulate gold to marry off their children.

Big jewellery houses such as Tanishq, TBZ, Delhi based PC Jewellers, Chennai based GRT Jewellers and many more jewellers has launched lucrative gold saving schemes. These schemes help to save systematically in small amounts like SIP with jewellers to buy gold at a future date. The instalments are as small as Rs 500 or Rs. 1000 and at the end to term jewellers add one instalment or some add two instalments.  The last instalment added by jewellers is actually interest on previous payments.

 

Scheme Provided by Jewellers

These scheme yield around 10% or 15% depend upon the scheme you choose. This is higher than the interest provided on Fixed Deposits and Recurring Deposits. These schemes make sense if you are planning to buy gold in the near future.  Though these schemes yields good return, a person who wants to purchase certain quantity in future may have to add some amount at the time of purchasing physical gold, if the gold price rises steeply during that period (Demonstrated in Table-1). If anyone opts to invest through gold schemes, he or she will be obliged to purchase jewellery at the prevailing market price. Big jewellers charge high making charge as well as high premium on their products resulting compromise on quantity of gold or extra cost by customers.

There are two ways in which you can buy gold in instalments. Your jeweller’s scheme mention above gives you credit for amount deposited but NOT equivalent gold every month. In ETFs (Exchange Traded Funds), you buy exact quantity of gold. And that is the big difference in rising market. In a falling market, the jewellers’ scheme would turn out to be more beneficial. This is the crucial aspect.

Jewellers’ Saving Scheme v/s Gold ETFs

Illustration

Here in this table shows that if a person wants to purchase 12 gm gold after one year, he or she has two options to invest. In gold scheme provided by jewellery houses or to purchase gold ETFs every month.

Option-1: A person decides to invest through Gold Saving Scheme

To purchase 12 gm, a person starts investment by taking current market price of gold with some safety margin. Investment for 11 months is by the investor and the last instalment will be added by the scheme provider. So a person gets return of 9.09% at end of 12 month (absolute).  But after 12 months, a person has to add Rs. 1078 to purchase 12 gm of Gold.

Option-2:  A person decides to invest through Gold ETFs

To purchase 12 gm gold through investment in Gold ETFs, a person starts purchasing one unit of ETF every month. After 12 moths 12 units collected which can be redeemed to purchase 12 gm of gold.

If a person is saving for his or her children’s marriage, which is several years far, then the gold saving scheme may not help as much effectively. In this case a person should choose such investment vehicle which has returns linked with gold price.

Systematically investment in Gold ETFs would be the better option for the person who is planning to purchase gold after several years. Gold ETFs are available in units which represent one gram of 24-crt gold of 99.5% purity. These units can be held in demat account as long as we want. As unit price replicates gold price, one can redeem units at any point of time to purchase physical gold. Apart from Gold ETFs one can consider E-Gold buying provided by NSEL.

Gold has been very volatile in recent past and its is rising very steeply since last 5 years. The table below shows that the steepness of return is increasing as years pass. The Chart shows the gold price since 1979.

Steepness of Gold Price

Historical Gold Price

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