Gold Saving Schemes-Who will benefit?

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Recently a Kannada news channel aired a debate related to Gold Schemes run by local Bangalore Gold Jewelers and how much are they regulated or what risk involved in them. I watched that debate fully for 2-3 days. Shocked to find that no one actually know the rules and regulations involved. Let me disclose my findings.

Gold Saving Schemes

Before proceeding further, let us understand how these gold schemes will run. This is a typical and most popular way of gold investment among Indians. Usually these schemes are meant for low earners. So installment will start at as low as Rs.500. Period of such schemes will be around 1 Yr to 2 Yrs maximum. You need to pay monthly installment on fixed date. Benefits will be two types a) Each month’s gold rate will be considered for accumulation of gold and total accumulation of gold units will be payable at end in terms of jewelry and b) You will pay 14 months and 15 months payment will be by jeweler. Rate of gold will be as on 15th month only.

Here in such schemes you will not get any cash in return but only Gold ornaments. Even if you stop future payment in middle due to any financial problems then they will not return the already paid amount. Few gold shops offer you some discount in making charges or wastage who are member of this gold schemes (but do remember that such offer only to few designs). But who determines the wastage or making charges is only god knows. So in plain it looks like typical recurring deposit.

Now let me disclose few findings-

1) Gold rate never falls-This is the major motive why we Indian have so much lure towards goal. Also this is the reason why we enter now itself at any gold scheme, which promises us to give in future at current rate or with some benefits. Proof of the same is increasing demand in Indian buyers as well as historical returns of gold prices. But the current trend in gold market will actually a real lesson to all. Gold is an asset which behaves same way as other assets like supply and demand. Also when you consider the historical returns of gold then it gives you considerable proof that it never beat equity.

2) What guarantee of Bank Deposits?

A member of gold jewelry association asked this cross question when someone asked him about the guarantee of deposited amount. He claimed that maximum we can get from bank in case of bankrupt is Rs.1,00,000 as Deposit Insurance. We agree, but accepting deposit and offering interest rate of banks are within the rules and regulation of  RBI. But in case of these schemes who are such regulator?? No one but a gold shop owner. So if you have belief than Bank Deposit then go ahead 🙂

3) Negligible business-

Another member who is owner of big jewelry shop claiming that they have investment of around few hundred crores. Considering that investment in business, this scheme amount is very less. So how one can assume that shop owner will run away one day 🙂 But he forgot that each Rs.500 into thousands of investors will turn out to be a huge cash. So we definitely have valid reason that he may close his shop and run away. Above all his networth is not so big like Sahara group 🙂

4) Why can’t target Chit Funds-

A member of jewelry owners association had this valid point. They are running such schemes since few years. But there are unorganized and unregistered chit funds, running since 50-60 years. So why can’t catch them?? This answer seems to me as if when we target a politician about his wrong doing and he points to opposition party.

5) Conditions agreed and signed- 

Association members claiming that investors after reading the terms and conditions fully they are signing. So investors are also equally responsible. So it is just shows their irresponsible behavior about money and customer. They forget that 95% of investors in such schemes are low earning or financially illiterate. En-cashing such  ignorance towards their benefit is most dangerous.

6) Unaware about regulations-

Shops who run such schemes are unaware that they are running these schemes without getting approval of regulators. They simply don’t know that approval required for such schemes. This is not the case with small jewelry shops but a big shops who claim to be number one or two in Bangalore city.

Going by above points, you notice that how such schemes are floated and how the small or retail investors are get cheated (in case of jewelry shops default). Hope this will open eyes of few who are gold savvy and such gold scheme savvy.

Image courtesy of [ Anusorn P nachol] /


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8 Responses

  1. Also the Indian public need to realize that:

    Although Gold is a safe haven investment and possibly a hedge against inflation, our mode of Gold investment i.e. in terms of jewellery is a recipe for regressive returns.

    Psychological we invest in Gold think thinking that it will help us beat inflation – However when you convert your Gold investment into a Jewellery you are adding a layer of cost to that i.e. 10% – 15% – This is not inflation beating. Infact this is regressive and you lose money!!!

  2. Unfortunately the Gold Jewellery shops are feeding on the ignorance of public, especially the housewives (who believe in the sentiment that Gold investment is evergreen and prices never drop). The Gold schemes are a huge money spinner and critical for these Jewellery shops to feed their working capital requirement. Here’s the anatomy of the scheme:

    You pay for 11 months and jeweller pays for the 12th month: You are allowed to come to the shop on the 13th month (i.e. one month after your scheme closes) and order your jewels (which will take another 20 – 30 days to prepare, if you dint buy a readymade one). So In all the jeweller has access to your money for 14 months – Effective return on your Investment – given that the jeweller pays the 12th installment – would be between 11 – 12%; This is considering that Gold prices are stable through the year.

    Benefits to the Owner:

    1. The 11% Cost of funds is cheaper than 14% – 15% that banks charge for OD / short term credit facilities
    2. The Jeweller charges 12% – 15% making charges and wastage (and recovers his cost of capital); Thereby effectively making a descent 3% on your investment!, that he held for 14 months
    3. I know of a leading Jeweller in Mangalore (a trustworthy one), who has 50,000 accounts in terms of monthly schemes – You can do the math here: 50,000*500*11 = 27.5 Cr. His overall investment could easily touch over 80 Crores – so the scheme is effectively funding a large portion of his working capital requirements for the year at a very low negligible cost

    Other sundry benefits:

    1. Very often customers don’t land up on the day the scheme closes – There is always some lag
    Your Rs 5,500 (i.e. 500*11) earns 55 rupees a month for the jeweller for every additional month of delay to claim your jewels
    2. People often wait for 2-3 months for their other schemes to close, so that they could pool in all the savings to buy that big piece of jewellery – I have seen my own family members wait for 4 months for other 4 schemes to close and pool in all the savings to make a bigger jewellery – For very month of delay- you are in fact helping the jeweler earn / make a return on your investment

  3. Hello Basav, Why don’t you take initiative and write to RBI about this malpractice prevalent in almost all cities. This will be of good help for coomon Indian citizens and also plub one of the ways to channel and park black money.

  4. Good article. Even large jewelry retailers like Tanishq have such schemes where the customer pays for 11 months, and the 12th month’s contribution is paid by the company, and at the end of the 12th month the customer can come to store to buy gold ornaments only (not gold coins). Though it translates into about 16% interest, the actual benefit to customer would be much less, even -ve returns, if gold rates have appreciated significantly over the 12 month period. Seems mainly those with side income, and loads of black money (or other income in cash) tend to invest in such schemes, as gold is still seen as a ‘safe’ investment in India.
    Also, such schemes should have been banned by RBI, as such jewelers operate like NBFCs seeking deposits from customers for future purchases. Amazing how no major financial expert has raised a hue & cry about this so far. Maybe they are waiting for a major scam to unfold before their customary ‘I told you so’ statements.

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