Investing every month with a jeweller to buy gold? Here’s why you should think twice before doing that

As the festive season approaches and you plan your gold purchase for auspicious or other reasons, there’s a high chance that while you decide what to buy, the salesperson across the counter will start explaining their golden harvest scheme. The discussion usually begins with the benefits of the plan, such as how the jeweller will pay a certain percentage of the last instalment and how you can time it during the usual discount period to maximise your investments.

First things first: A Golden Harvest Scheme, often offered by jewellery stores and jewellers, is a savings plan that allows individuals to save over a specified period. Here’s how it typically works: Customers choose to make regular monthly payments towards the scheme, usually for a predetermined duration, often ranging from 10 to 12 months. The jeweller offers a specific payment structure, where they commit to paying a certain percentage of the total scheme value at the end of the term. To encourage participation, jewellers often provide additional incentives, such as bonus amounts or discounts when customers complete the full tenure of the scheme.

At the end of the scheme’s tenure, customers can use the accumulated amount (including the jeweller’s contribution) to purchase gold jewellery from the same store. This jewellery may be in the form of ornaments, coins, or other gold items available in the jeweller’s collection.

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Consider this: You can choose to invest between Rs 5,000 to Rs 5 lakh per month for 10 months, and in return at the end, your jeweller will pay you bonus equivalent to 55 per cent , 65 per cent, and 75 per cent of the monthly amount for 10, 11, and 12 months, respectively. For example, if you opt to invest Rs 5 lakh, the jeweller will pay Rs 2.75 lakh (for 10 months duration), Rs 3.25 lakh (for 11 months duration), and Rs 3.75 lakh (for 12 months duration) upon maturity of the scheme. 

The amount may seem attractive, but when you calculate the Internal Rate of Return (IRR), it only works out to just 1 per cent. Yes, just 1 percent. At a time when the Sensex has yielded a return of 12 per cent over the last year, gold itself has provided a 16 per cent return, and fixed deposits offer as much as 7-8 per cent, you would only get a 1 per cent return for a one-year investment.

No wonder the scheme is pushed so much at the jewellery shop given the high margin business it has turned into.

Another drawback of the scheme is that it limits you from buying pure gold or receiving cash back. You are restricted to purchasing jewellery, which could result in a loss of value due to making charges and wastage. Therefore, it is better to do an SIP in debt fund or start an RD to earn higher return for purchasing jewellery. If investment is your purpose, then clearly there are more alternatives available in the market.