Should you opt for a gold savings scheme?

Gold schemes offered by jewellers help build a steady corpus for special occasions, but read the fine print to know whether you gain from them     Kick-starting with Dussehra, the festival season has begun in earnest, and so has the gold-buying season. The celebration will peak next month during Diwali and Dhanteras, which are considered the most auspicious for buying gold. Most Indians still prefer to hoard gold the old-fashioned way—jewellery and coins—rather than invest in paper gold. Should you shell out a chunk of your savings to buy gold now, considering its high price? Over the past few months, the price of gold has zoomed from 28,000 per 10 g in mid-May to 30,765 on 26 October.      Of course, if you buy a sizeable piece of jewellery, such as a bracelet or necklace, during this season, you may end up burning a hole in your pocket. This is why many popular jewellers offer gold schemes. You can enroll in such a scheme for as low as 500 a month for a tenure of 11-36 months. At the end of the chosen period, you will get extra cash from the jeweller, which you can use to buy the ornaments you want. However, before you jump on to such a scheme, here are a few things you should consider.  How does it work?  Gold or jewellery savings schemes come in two forms. A typical one allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited, including some bonus amount. This conversion is done at the gold price prevailing on maturity. In most cases, the jeweller adds a month's instalment at the end of the tenure as a cash incentive or may even offer a gift item. For instance, popular branded jeweller Tanishq runs the 'Golden Harvest' scheme, wherein you need to invest a fixed amount every month (minimum 500) for 11 months. The twelfth instalment, is paid by the retailer.      There is another form of savings scheme, which lets you book small quantities of gold every month at the prevailing rates, instead of converting the savings into gold at the final price. For instance, multibrand jewellery store Gitanjali Jewels offers a scheme 'Swarna Mangal Kalash', wherein you can book gold every month in multiples of 1 g at the existing gold rate for 18 months. At the end of this period, you can redeem the total amount of gold booked, regardless of the price on the redemption day. However, both types of schemes allow you to buy only jewellery, not gold coins or bars.  What to watch out for  Pay for making charges: At the end of the term, when you actually buy the ornament, the seller will levy making charges. Usually, these are very high and can go up to 30% of the value of the item, depending on the extent of workmanship involved. A high making charge could effectively wipe out any saving you make through the additional instalment or bonus. Some jewellers throw in a 30-50% discount on the making charges, while a few waive it completely in case of plain gold jewellery.  No control over gold price: In many schemes, the jewellery you purchase at the end of the tenure is available at the prevailing market rate. Since there is no way to lock in to the purchase price, you cannot know the actual cost of conversion. If this final price is much higher, your money will fetch a smaller quantity of gold than the one you would have got by booking at the current price. You will only benefit if the price of gold at the end of the term is lower. To avoid making a loss, you could opt for a price protection scheme that lets you buy gold every month at existing rates rather than doing so at the end of maturity. Says Santosh Srivastava, MD, Gitanjali Jewels: "Such a scheme will help customers average out their cost of purchase over a period of time, in the same manner that a systematic investment plan (SIP) in a mutual fund does."      It is also a better alternative as the impact of the final gold price on your actual purchase is nullified. Says Neeraj Chauhan, financial planner, Financial Mall: "Under the fixed price option, you know for sure the quantity of gold you will ultimately get, instead of worrying about the fluctuating gold prices."  Agree to seller's terms: When you opt for any of these schemes, keep in mind that you will have to ultimately buy gold from the same jeweller. This means that you cannot negotiate with him on making charges, which differ from seller to seller. In the normal course, you could have hunted for a good deal by haggling with multiple sellers.  Should you go for it?  These savings schemes make sense if you cannot pay a lump sum to buy expensive jewellery. Buying gold or putting away money for it in small instalments is less of a burden on the wallet than paying a hefty price for it at one go. Srivastava says, "With our gold savings scheme, we help customers plan in advance for any particular occasion, such as a wedding or festival." The schemes that offer a higher cash incentive for a longer maturity savings plan will give you higher benefit.      However, if you are considering gold as an investment avenue, you are better off putting your money in other instruments. The high making charges, higher price of jewellery, and fluctuating gold prices will eat into any returns that these schemes claim to offer. If you want to accumulate cash to buy gold, you can get better returns if you invest in a recurring deposit. This will also give you more control over the place from which you buy and the price at which do it. Another good option is to invest in gold exchange traded funds (ETFs), wherein you can buy units and convert them to physical gold later. There are no making charges or premium involved and the income from gold ETFs is treated as long-term capital gains and taxed at a lower rate if you hold them for one year, compared with three years in case of physical gold. Physical gold also attracts wealth tax.