Beware of the risks of Jeweller’s gold schemes

“There is no greater fraud than a promise not kept.” Gaellic Proverb

Key takeaways:

If you want to do a fixed deposit, go to a bank. Savings or deposit schemes offered by jewellers is not a bank fixed deposit.
Normally people compare these schemes with bank fixed deposit returns and conclude these are better due higher return potential. This is erroneous as risks are different.
The biggest risk is credit risk of jeweller. The jeweller can default on his payments (as we have seen recently). So, few percentage points of extra return, you will be left with 100% loss of your money. Avoid such schemes, better to be safe than to be sorry!

In India, buying jewellery is another way to buy gold. I have written about how gold can be bought. Unless you need jewellery, there are better ways to buy gold. You can read more about this in our article The Best Way To Buy Gold

However, sometimes we really need to buy jewellery. The price of gold is high and many people save up some amount to buy gold jewellery eventually. Many jewellers offer you to deposit some amount on monthly basis with them and then buy jewellery later on. They structure the scheme in such a way that the return you get from jewellers is higher than returns from deposit schemes of regulated banks and other financial institutions.

However, there are risks associated with such schemes which we tend to ignore in our quest for higher returns. This was manifested recently. There was news about a big Mumbai jeweller Goodwin Jeweller absconding after taking money from customers is such gold saving schemes. The social media is also abuzz with news of another Mumbai jeweller absconding (Gold purchase schemes under scanner as two Mumbai jewellers allegedly dupe investors). Apparently, Goodwin lured people by offering ~18% interest on the deposit money. As I have written earlier – promise of very high return is the oldest trick to dupe gullible people. Now lot of people are in panic and wondering how they can recover their money. Let us go in more detail about how these schemes work and why it doesn’t make sense to put your hard-earned money in such schemes.

How do such schemes work?

These schemes are popularly called Gold Deposit Scheme or Gold Saving Scheme. Essentially, the jeweller asks you to deposit certain money for 10 months or 11 months (depending upon how attractive they want to make it) and then contributes one or two installments from their own side. For a typical scheme, say you agreed to pay 10,000 per month. So, you will be paying 10000 each month for 11 months. The builder will contribute 10000 of the 12^th month (you pay zero in the last month) and you can buy any jewellery worth 1,20,000. This means that you are getting a rate of return of 15.86%.

On the other hand, had you invested the same amount in a fixed deposit for 10 months, you would have received 1,02,583 after a year.

Note: The above is just for illustration. Different jewelers may have different schemes whose returns may vary from the above.

What’s the catch?

Regular readers of my columns will know that there are no free lunches in the world. In fact, RBI at different points of time (here) has tried to regulate deposit scheme. Jewellers take advantage of regulatory gap and take deposits.

The jeweller has two benefits:

The jeweller is getting fund from you and paying an interest rate of around 16%. This is not too high compared to the rate at which he borrows from banks.
The jeweller is also getting a commitment from you that you will buy certain amount of jewellery from him at the specified time.

So, jeweller is getting financing as well as confirmed order from you.

The advantage for you is that you are getting good return on your deposited money. However, the additional return that you are getting is because you are also taking additional default risk.

The problem for you is:

You have to buy jewellery of at least the final maturity amount. In the above example, you will have to buy jewelry worth 120,000. Say, you liked some jewellery that is worth 1,15,000. Then you will have to buy something more worth 5000 or even more to exhaust the whole amount. My personal experience is that you might buy something that you wouldn’t have bought otherwise.
The BIGGEST problem is what if the jeweller defaults. Jewellery shop is not a deposit taking financial institution. Hence, there is no protection from government or RBI. So, for additional 7% to 8% return, you are risking 100% of your capital.
As the jeweller is aware that you don’t have any option but to buy jewellery from him, he might not give you the best deals on making charges or discounts.
Also, the time when your scheme matures might not be the best time for buying jewelry due to sharp rise in gold price or some other factors.

So, overall it appears to me that such schemes are best avoided. This is not meant to indicate that all jewellers are dishonest or they will default. However, there is no risk free return here but there is real possibility of return free risk!

Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial adviser for guidance on any investment related query.

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