This story is from August 1, 2011

Do you gain from gold SIPs?

Khyati Dharamsi / TNN / Aug 1, 2011, 07:33 IST

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The gold juggernaut seems virtually unstoppable. Over the past six months, the price of gold has zoomed from 20,688 per 10 gm on 1 January to 23,310 per 10 gm on 21 July.

The gold juggernaut seems virtually unstoppable. Over the past six months, the price of gold has zoomed from 20,688 per 10 gm on 1 January to 23,310 per 10 gm on 21 July. To counter the price rampage, jewellers have come up with big incentives on their gold savings schemes, which have been in vogue for nearly a decade now. They are offering gifts and providing free entry as privileged members, among other things.
Under a gold savings scheme, you invest a monthly sum with the jeweller for a fixed period and he pays for the last instalment.So if you want to avail of the scheme for a year, you pay 5,000 for 11 months. The jeweller pays the twelfth instalment and you will be able to buy gold jewellery worth 60,000 from him.
However, you can use the money to buy only gold or diamond jewellery, not silver or gold coins, even bars. You may also have to bear other expenses, as Bangalore-basedYusuf Motorwala discovered. After investing 1,500 a month with a jeweller for 18 months, he was told in February this year that he would have to making charges of 350 per gram. Such charges may vary, but the more popular the brand, the higher the making charges.
Moreover, if you don’t like any of the jewellery pieces that are on offer, you will not get a cash refund, a condition stated upfront by most jewellers.

For payment, you must deposit a cheque every month or give post-dated cheques. Some jewellers also offer the ECS facility, where a fixed amount is automatically transferred from your account into their account. If you are unable to pay an instalment, your term will be extended.
However, there is some discrepancy in the way the jewellers calculate the price of gold. “If you are paying money over 12 months, you should know the price at which you will finally buy gold. If it is bought at the price prevalent at the end of the period, you may lose out on the opportunity to buy it at a cheaper price.

Over the past few weeks, prices have decline by about 1,000 and then go up again by the same amount,” says Hemant Rustagi, CEO, Wiseinvest Advisors.
To solve this problem, most jewellers offer passbooks and enter the gold price applicable for each month’s instalment. Mehul Choksi, chairman and managing director of the Gitanjali Group, says, “As the buyers pay every month, we give thema monthly NAV. The gold is moved to the inventory and, at the end of the period, converted into gold jewellery purchase.” In this case, how do the jewellers make enough money to pay for the last intsalment? Most of them are hedging their bets through commodity futures. For instance, if a jeweller expects gold prices to rise in the future, he signs a pact to buy a given quantity at a lower, predetermined price and date. If the price goes up, he paysa lower price for it.
Recently, jewellers have also begun aggressive promoting of diamond jewellery. Gitanjali Jewels offers two free instalments on the purchase of diamond jewellery, while it provides only one free instalment for buying gold jewellery. Some jewellers in the south readily bear the cost of value-added tax if you buy diamond jewellery using the gold savings scheme. “The returns on diamond jewellery are higher as the profits in this segment are also higher,” says Choksi.
Are these schemes particularly beneficial to buyers even after the incentives? Most experts don’t believe so. “There is no advantage for investors in building a corpus with a jeweller. If you want to accumulate cash to buy gold, invest in a recurring deposit for better returns. Also, this gives you more control. You can decide where to buy the gold from and for how much,” says Rustagi.
A better option is to invest in gold exchange traded funds (ETFs). “Gold ETFs also have lower expenses. You can buygold ETF units and convert them to physical gold later,” adds Rustagi.
Another thing that needs to be considered is the risk while investing with a jeweller, especially ensuring that the jewellery you buy is of the carat that was promised. Vijay Bhambwani, CEO,BSPLindia .com, a commodity trading advisory, says, “There are various funds, such as Benchmark Gold BeES, UTI Gold ETF and Quantum Gold ETF, which allow you to buy even half a gram of gold. The price of gold in these funds is the same as the market price of gold, but these are a lot safer because of being listed, whereas jewellers are unorganised players. You have no regulatory redressal in case of a dispute in the case of the latter.”
While gold ETFs are currently considered more tax-efficient compared with gold jewellery, the Direct Taxes Code, which will come into effect next year, is set to remove any such distinction. If you redeem the gold ETF units in 2012, the capital gains will be added to your income and taxed accordingly.

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