Understand Monthly Gold Scheme

With the recent surge in the gold prices, which reduced the physical demand of jewelry in India, Jewelers have come up with monthly plans for the gold.  The schemes vary in nature with core concept being to deposit fixed / variable  amount with the jeweler periodically  for a fixed number of months and you shall be able to purchase the gold worth more than what amount you deposited totally till end of period. One such scheme I shall be analyzing here works as follows “You pay 11 installments and we pay one for you”.

The getting one EMI fully free from the jeweler attracts everyone. Who do not want ‘FREE’ goodies. Getting a free installment, and that too for purchase of GOLD, attracts many who cannot afford to buy the precious metal at its current value.  The enthusiasm to understand the offer and find who is the beneficiary resulted in below analysis.

If I start investing Rs. 10,000 per month from 1 Sep 2011  and pay Rs. 1,10,000 in eleven installments.  The next installment is paid by the jeweler, so that means on 1 Sep 2012 I can buy gold worth Rs. 1, 20,000 from the jeweler.

Had I invested Rs. 10,000 every month for 12 months in a recurring deposit with 10% of interest rate compounding quarterly the amount would have been Rs. 126646.  Here I invested for 12 months to get Rs. 6646 interest whereas I got 10,000 for investing 11 months.  Approximately 15% of the interest without risk.  I am a perfect gainer (at least not loser) on paper so far.

Now if jeweler is giving 15% interest on my money, what is he earning and how?

In numbers, he is paying 5% more than a fixed income scheme (Recurring deposit) so he must be definitely putting my money into a money instrument which gives him more than 15% gain in an year. What else than ‘GOLD’ will he invest.  From the last 3 years (since I started following gold price), Gold has given returns more than 15% per annum. So simply said my money will be invested today in Gold for me to purchase at end of term.

On the other hand the jeweler would know his customer base for next year. Thus even if price of gold on 1 Sep 2012 is 40000 per 10 gram, he still has a customer because I had invested my money into his plan.

Will I go for the it ? Well before jumping in, I want to know few more as listed:

• Will I be eligible to drop in between ? If yes will I be getting the share of the free installment on pro-rata basis ?
• If there is a great offer I am interested to purchase before I pay all the installments, will I be able to purchase ? What conditions apply here ?
• After the completion of installments (12 months), is there any limited period within which I need to purchase the gold ?
• Will I be allowed to bargain ?
• Can I en-cash the amount after 12 months instead of purchasing ( there are no silly questions) ?
• Can I gift that amount to someone who can then purchase gold (like gift card)
• If I paid installments in bangalore, can I buy the gold in Delhi’s branch ?(Remember… gold rates differ in cities)
• Can I buy coins instead of jewelry ?
• Will the amount paid by jeweler (i.e., one installment) taxed to me ?

I shall be finding out the details now ! Be ready for my next post with answers.

DISCLAIMER : Opinions given in this blog solely belong to my understanding. They are not intended towards favor or against any product or company as such.