Dhanteras 2023: Start saving for your next purchase of yellow metal this Diwali and discover a new method for buying gold

 Dhanteras 2023: Start saving for your next purchase of yellow metal this Diwali and discover a new method for buying gold

This memo will be extremely helpful if you are going to purchase gold or if you are starting to save for the upcoming Dhanteras. It offers you an other option that can be more economical.

During the auspicious Dhanteras festival in India, gold is purchased in the form of jewelry, coins, or bars. Many people either purchase it all at once or use the money they've saved to subscribe to a gold savings plan.

This memo will be extremely helpful if you are going to purchase gold or if you are starting to save for the upcoming Dhanteras. It offers you an other option that can be more economical.

The Gold Savings Plan

The majority of you have probably heard of the gold savings programs offered by almost all jewelers, in which the jeweler contributes one or more installments in exchange for monthly installments from the consumer. Customers may use the money they have saved up via the program to buy gold or jewelry at the current gold prices at the conclusion of the term. In a sense, this is a beneficial idea since it assists customers in

Make saving a habit by setting aside money on occasion.

⦁ Receive a periodic sum from a jewelry contributor's gift.

At the conclusion of the term, create an asset in the form of gold.

An example of this kind of plan from a jeweler:

What is the catch, then? Are there any potential hazards? Let's take a comprehensive look:

1) Counterparty Risk: Credit risk is one of the biggest hazards that consumers overlook in this situation. And should the jeweler file for bankruptcy? When clients sign up for such programs, there is no assurance or gold collateral provided by the jeweler. Many jewelers in India, including large chains, have filed into bankruptcy, leaving many of the clients who signed up for these plans without a place to live.

2) Gold price risk: What if the price of gold increases at the conclusion of the term? Even if they pay regular installments, clients in gold saving plans do not profit from increases in gold prices. In fact, when the program comes to an end, customers often wind up purchasing gold at a greater price.

3) Ancillary cost: The price of gold that a jeweler quotes is more than the real price, and it also differs from jeweler to jeweler. This is because the price of genuine gold is increased by a number of ancillary cost components. This covers the 3% GST on gold, the jeweler's markup on the price of the gold, and any additional fees based on the kind of gold bought.

According to statistics from November 7, 2023, the price that leading jewelers offered for 24 carat gold coins was around 11% more than the going rate for gold. Customers will be forced to accept the jeweler's pricing since they are required to purchase gold from them under the program.

An example of how the price of gold changed on November 7, 2023

This is just a suggested range based on information from many websites and open disclosures.

4) Selling price markup: The price at which gold is purchased is often less than the price at which jewelers sell it. Customers must thus pay for this expense as well when it comes time to liquidate their gold. In the case of jewelry, there is also a loss or waste aspect that affects the selling price.

How might a SIP in gold ETFs and gold funds of funds be a better option than a jewelry retailer's gold savings plan?

Risk of counterparty:

Let's start by defining gold ETFs and gold funds of funds. Gold exchange-traded funds (ETFs) are mutual fund schemes that invest in real gold with a purity of 999. Their units are listed on stock exchanges for purchase and sale. In order to invest in Gold ETFs, an investor must have a demat account. A demat account is not required to participate in Gold ETF FoF, a mutual fund scheme that invests in Gold ETFs. Investors may invest in the fund in the same way as they would in any other mutual fund. Physical gold is stored in a vault under strict security and is covered by insurance. Because genuine gold backs both the Gold ETF and the Gold ETF FoF, there is no counterparty risk.

Pricing: The real domestic price of physical gold is closely related to the Gold ETF and Gold ETF FoF values. There won't be a markup or manufacturing costs. Moreover, GST paid on the purchase of gold may be deducted from GST received at the time of sale. Investors profit as a result, and this is reflected in the fund's NAV. The investor must, however, accept the ETF/fund fee ratio, which may reach 1% annually. When compared to the 11% premium paid, this is still quite modest. Hence, if an investor purchases gold exchange-traded funds (ETFs) or gold ETF foF, they avoid paying extra markup, making fees, and other auxiliary costs.

Gold price movement: Depending on the current gold prices on that day, investors get units for each installment. As a result, investors may profit from growing gold prices in ETFs and funds since the fund's NAV reflects this.

Using historical evidence as an example, which is preferable?

Let's contrast two investing situations.

⤁ Pay the jeweler's 13th installment after 12 months of participation in the jeweler gold savings plan. The collected sum is used to acquire gold coins from jewelers at a value around 10% higher.

⏁ Create a 12-month SIP in the Gold ETF FoF with a maximum cost ratio of 1%.

Final Result

⦁ 81% of the time, investors who invest in Gold ETFs have superior results. FoF vs the jeweler's gold savings plan

Seventy-five percent of the investors would have had good returns with a SIP in the Gold ETF FoF.

⦁ The mean absolute yield is about 7%.

Certain drawbacks of the Gold ETF or FoF compared to the jeweler's gold savings plan 🙁 The primary drawback of Gold ETFs, or Gold ETF FoFs, is their tax inefficiency. The investor must pay taxes on profits in Gold ETFs and Gold ETF FoF at the highest possible rate, which is determined by their slab rate. Investors who purchase actual gold from jewelers may benefit from a reduced long-term capital gains tax rate.

If you want exposure to gold, purchasing gold ETFs or FoFs is an excellent substitute for actual gold coins or bars. If an investor plans to purchase jewelry, there may be limited applications for gold ETFs or FoFs.

To put it simply, investors may find that gold ETFs or Gold ETF FoF are a superior option for obtaining gold exposure since they may reduce ancillary costs such as markups, manufacturing costs, storage costs, etc. Its values are based on real domestic gold prices and are supported by genuine gold that is 24 carats pure (999). Investors should be aware that while gains are not as tax-efficient as holding actual gold, they still make sense financially and eliminate many of the hazards associated with physical gold ownership.