Gold savings schemes may sound lucrative but make little financial sense

• Gold savings schemes offered by jewellers allow customers to invest in gold through monthly instalments.
• These schemes restrict customers to purchase jewellery solely from the jeweller running the scheme.
• Gold investment schemes entice customers with one free instalment or reduced making charges.

Diamonds are a woman’s best friend, it is said. But when it comes to India, it may very well be gold. India is the second largest gold buyer in the world which proves that the yellow metal is not a luxury item only in the country but something even the middle class wants to own.

Gold savings schemes offered by jewellers allow customers to invest in gold through monthly instalments. They typically run for 11 months, with the 12th instalment being free. Customers make fixed monthly payments, and at the end of the scheme, they can purchase gold jewellery or items equivalent to the total amount saved. Others might offer discounts on making charges when purchasing jewellery.

“Many jewellers provide unique gold investment plans, allowing customers to purchase gold in the future based on their preferences. These plans differ from one jeweller to another, so it's essential to assess their value and benefits,” says Harish Menon, Co-founder and head of Investments and product research at House of Alpha.

These schemes are very popular, especially since they come with a free instalment. Women invest in these schemes because they are an easy and disciplined way to buy gold. Additionally, parents are often seen investing in these schemes for the purpose of their kids’ marriage.

This brings us to the question whether investing in gold savings schemes makes financial sense? We take a look.

Disadvantages of a gold savings scheme

Gold savings schemes, while appealing, have their share of disadvantages. Firstly, these schemes restrict customers to purchase jewellery solely from the jeweller running the scheme, limiting their choices and flexibility in the market. You cannot get a refund even if you want.

“There is the possibility of the jeweller going out of business, leading to loss of investments. It's crucial to remember that jewellers aren't overseen by financial authorities, so there's inherent risk involved.” says Menon.

Also, investments in these schemes can be used only to buy jewellery, not coins or bars. Moreover, missing even a single payment can lead to the forfeiture of the accrued benefits.

Lastly, hidden charges, particularly making charges on jewellery, can reduce the actual value of the gold you receive.

Other alternate investment options for buying gold

When you are buying gold jewellery, you are at best buying it as only a partial investment. However, one needs to look at a gold savings scheme in terms of the returns on offer, beyond the free instalment and reduced making charges.

“It doesn't make financial sense as most of them hardly have any returns. They entice us with one free instalment or less making charges. The lure is to pay instalments instead of a lump sum. There is usually less than 5% return if any,” says Shweta Jain, chief executive officer and founder of Investography, a financial planning firm.

When investing in gold, options like Gold ETFs, and digital gold and sovereign gold bond schemes are good options as they do not require one to buy and store physical gold. But even when it comes to buying gold jewellery, one can look at alternate investment options for higher returns.

“SIPs can be done in mutual funds, say liquid funds, and that money can be used to buy gold as well, as that works better,” says Jain. For a longer investment horizon, one may look to invest in equity funds and buy gold to get the advantages of equity.

As they say, all that glitters is (may) not (be) gold(en).