Is it wise to invest in Gold schemes by Jewellers?

On a recent visit to a leading jeweller, I came across a gold scheme.

Typically, the gold schemes go like this:

You pay a fixed amount (instalment) every month and at the end of a specific period, you can purchase jewellery from the jeweller. Of course, the jeweller gives you an incentive to participate in such a scheme.

In this, I will discuss Golden Harvest Scheme from Tanishq.

Golden Harvest Scheme By Tanishq

1. You pay a fixed amount per month for 10 months.
2. The monthly instalment has to be in multiple of Rs 1,000.
3. You will purchase jewellery for the accumulated amount in the 11^th, 12^th and 13^th month
4. You can purchase only gold jewellery.
5. If you purchase the jewellery in the 11^th month, you get a discount of 55% of single instalment on the jewellery purchase.
6. If you purchase the jewellery in the 12^th month, you get a discount of 65% of single instalment on the jewellery purchase.
7. If you purchase the jewellery in the 13^th month, you get a discount of 75% of single instalment on the jewellery purchase.
8. You must mandatorily redeem the amount in 421 days. If you do not redeem the amount, your aggregate amount will be refunded to you without any interest.
9. You can close the offer after making payments for atleast 6 months. You will be offered pro-rated discount.
10. I assume that means if you stop making payment before paying for atleast 6 months, you will not get any incentive or discount.
11. You can purchase jewellery from any Tanishq store.

Do note other jewellers may have similar schemes. However, the features will be more or less similar.

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Illustration

You sign up for the Tanishq Golden Harvest scheme for a monthly instalment of Rs 10,000 per month.

In the next 10 months, you would have paid Rs 1 lac.

In the 11^th month, you will get a discount of 10,000 * 55% = Rs. 5,500. Essentially, you can make a gold jewellery purchase of Rs 1 lac + Rs 5,500 = Rs 1,05,500 in the 11^th month.

In the 12^th month, you can make a purchase of Rs 1,06,500 without paying anything extra.

In the 13^th month, you can make a purchase of Rs 1,07,500 without paying anything extra.

Point to Note

Golden Harvest Scheme is different form gold saving schemes like Swarnanidhi from Tanishq.

Under Swarnanidhi, you purchase gold every month i.e. gold units get credited to your account every month. At the time of scheme maturity, you can purchase gold jewellery to the extent of gold accumulated (gold accumulated X prevailing price of gold).

The difference between the two schemes is that in the first scheme (Golden Harvest), the investors take the price risk (volatility in gold prices). In the second case, it is the jeweller that takes the price risk.

Everything else is same.

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What is in it for the Jeweller?

From the perspective of the jeweller, it is a big win-win situation.

1. Makes for a great sales pitch. Everyone loves discounts.
2. The jeweller carries no price risk. The entire risk of fluctuations in the gold price lies with the investor.
3. It gets very cheap working capital. The jeweller gets money from you and does not have to give you anything immediately. Had the jeweller used cash credit facility from a bank, it would have to pay interest on the loan amount.
4. The jeweller is sure of the sale. Your money becomes captive. Who knows what you would have done with that money in 10-12 months? The scheme ensures that the jeweller makes a sale.
5. The jewellers make a lot of money on making charges. It can easily range from 15-30% of the cost of gold. These charges can be arbitrary.

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What about the investor?

On the face of it, it may look like a decent offer. After all, you get a reasonable discount on your jewellery purchase. This will inculcate savings and you will be able to purchase jewellery for say, daughter’s wedding or any other occasion.

However, there are still a few issues that you can’t ignore.

1. You are taking a risk on jeweller’s ability to pay you back. If the jeweller can’t give you back the promised gold jeweller, you are doomed. You can take legal action but your money gets stuck. You can’t be sure if you will ever get it back. Remember, the jewellery is not a bank. The Government will not come and save you.
2. You can purchase only gold jewellery. You can’t purchase gold coins or biscuits. Therefore, you will have to incur jewellery making charges, which can be quite high. With your money tied up with the jeweller, you are unlikely to have any bargaining power on the making charges.
3. You are tied up with the jeweller. You can’t go to another jeweller. Therefore, you lose out on flexibility.
4. The rate of gold at the leading jewellers can be a bit higher than other jewellers. You will get all kinds of strange reasons but they charge a premium. By the way, I am not saying you shouldn’t buy from leading jewellers.
5. You can’t use the money for anything else. You must purchase jewellery.
6. You will incur GST at 3% (as on December 18, 2017). Not much you can do about it. GST is applicable on any physical gold purchase. However, if the intent was merely to invest in gold, this is a double whammy (in addition to making charges). With Sovereign gold bonds, you do not have to pay GST. By the way, I am not saying you must invest in Sovereign Gold Bonds.

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Should you participate in such Gold schemes by Jewellers?

Personally, I am not convinced and will not opt for such a scheme.

Let’s assume you could have put the money away in a recurring deposit for 10 months. At 6% p.a., you would have Rs 1,02,750 (pre-tax) at the end of 10 months. You clearly have more money to purchase under the gold scheme.

However, for the small benefit, I am taking a risk on the jeweller.  And jewellers do fail. Read about a recent failure here.

Moreover, I am losing out on flexibility and I am sure to be ripped off in making charges.

What will you do?

Additional Read

Tanishq Golden Harvest: Terms and Conditions and Frequently Asked Questions

Tanishq Golden Harvest: Home Page

How Jewellers calculate the price of Gold Jewellery?

Suppose you are purchasing gold jewellery. I assume there are no studded stones and diamonds in the jewellery.

Let’s assume the weight of 22- carat gold jewellery is 20 grams.

The leading jewellers have gold rates displayed prominently in their stores.

Suppose the price of gold is Rs 2,800 per gram.

The cost of gold will thus be Rs 56,000 (2,800X20).

Let’s assume the jewellery making charges are 20% of the cost of gold.

The jewellery making charges will be 20% * 56,000 = Rs 11,200.

GST will be charged on both the price of gold and making charges.

Prevailing GST rate for gold is 3%.

GST applicable = 3%*(56,000 + 11,200)= Rs 2,016

Price of jewellery = Rs 56,000 + Rs 11,200 + Rs 2,016 = Rs 69,216