I’ve never explored gold as an investment vehicle as (fortunately or unfortunately) my wife doesn’t like gold too much. Whenever someone asked me if gold was a safe investment, I wouldn’t discourage them. After all, one can’t advocate mutual funds without believing in diversification. Gold had been a lot on my mind, especially after I heard about the 11 month scheme that jewellery stores offer. So I decided to do some research by talking to a few people and going to jewellery stores. Here are a few things I learnt (do note this article is about physical gold not e-gold, that will follow)
What is this 11 month scheme offered by jewellery stores?
It is a simple scheme. You make payments every month for a specified number of months and then buy jewellery for the accumulated amount. The store offers you something extra if you participate in this scheme (like discounts, no wastage or value addition charges). Below are the typical features of these schemes
- The schemes run for a minimum of 11 months
- You have to pay the committed amount every month else the scheme benefits will be withdrawn, partially or fully
- You have to buy jewellery within a specified few weeks after the payment period gets over
- If you do not buy jewellery in the specified time or if you violate the terms of the scheme, the store will refund your money without interest
Is the 11 month scheme useful?
I have a personal discomfort on these schemes. It is the risk of the jeweller facing business issues and not being able to fulfil the terms. Unlike a bank or a mutual fund which is highly regulated and transparent, we cannot obtain any insights into the financials of the jeweller or avail any recourse if the jeweller does not deliver. There are a few safeguards one can adopt
- Instead of paying the jeweller every month, place the instalment amount into a recurring deposit or start an SIP into liquid funds. Withdraw that amount when you are ready to buy gold. However this will require some discipline and effort
- You may be better off choosing Tanishq from Tata Group as you can be sure of product quality and their ability to uphold the terms of the scheme
- If your intention is to hold gold as an investment, you can purchase gold coins. They can be redeemed for practically full value as there will be minimum wastage or making charges
How much gold should you buy? Where can you store it?
There is no constraint on buying gold. What will be good to have is a target. From what I can gather, most folks have two targets when it comes to purchasing gold
1. Enough jewellery for the ladies in the family to wear on occasions
2. Accumulating a decent quantity and number of ornaments for their daughter(s) wedding. So you can buy any amount, it could be half kg or 1 kg or what your bank locker can hold
As for storage, you can read this article and decide what the best route is
https://www.indiatoday.in/magazine/from-india-today-magazine/story/20180101-bank-lockers-rbi-robbery-jewellery-cash-insurance-1112597-2017-12-24
What are the returns on gold as an investment?
I don’t normally like to put up charts with a lot of data on it but this one has interesting insights when you look at the annualised rate of return.
Source - RBI archives
Returns are annualised returns
The way to read this chart is that if you bought gold, held it for 1 year and sold it after that, you can expect a return falling between -3% to 34% based on historical returns. Similarly,
3 year returns range from -4% to 26%
5 year returns range from -1% to 25%
10 year returns range from 11% to 19%
So you can see it is a myth that gold never loses its value. Gold behaves like other investments i.e. risky in the short term but the longer you stay invested the lesser are the chance of losing money. Don't panic, just follow the advice applicable for mutual fund investors. Stay invested for the long term, time your sale properly and the probability of making a negative return on investment comes down drastically.
My recommendation is that you can invest in gold but given the lack of regulation and other risks, you must restrict your exposure. So design a conservative yardstick and invest accordingly. For example, if you have Rs 5.00 lakhs in FD, you can invest half of that i.e. Rs 2.50 lakhs in gold. Another yardstick could be investing up to 20% of your mutual fund holdings.
To understand the workings of gold movement and what drives its prices, please check these super articles by my friend Arun
https://eightytwentyinvestor.com/2016/04/13/gold-returns-making-sense-of-history/
https://eightytwentyinvestor.com/2016/04/15/gold-a-futile-attempt-at-predicting-the-future/
Do send in your queries, feedback or counter-points on this article, it will really help. To discuss this or your financial planning and portfolio in detail, reach out to us at mathewpravin@yahoo.com or +91 7619593111.
