Gold saving scheme at jewellers vs SIP in Gold Mutual Funds and Gold ETFs: Which is better?

With gold prices touching the ₹1 lakh mark in recent weeks, buyers are seeking smart ways to lay their hands on the precious yellow metal. One such way is to accumulate funds through the gold savings plans offered by jewellers. But are they the best option? And how do they compare with monthly SIP in gold mutual funds and ETFs? This article breaks it down to help you find out which option may be better for you.

First, let's explore the gold saving schemes of jewellers

Jewellers offer gold saving schemes. These schemes imitate a Systematic Investment Plan (SIP), typically for 10 to 12 months. However, the end result and risks of these schemes are not the same as those of SIPs in gold mutual funds and ETFs.

In a gold savings plan, the customer deposits a fixed amount per month for 10 to 12 months. In the 11th or the 13th month, as the case may be, the jeweller either adds a pre-fixed amount to the customer’s account or provides a discount on making charges at the rate decided at the time of opening the account.

Some examples of gold saving schemes

Suppose you plan to invest ₹10,000 per month in a 10-month gold saving plan with a jeweller.

While there are many types of gold saving schemes, varying from one jeweller to another, we have taken up two popular variants to help you understand:

The jeweller will add the amount of gold that can be purchased for ₹10,000 to your account every month. After the 10th instalment, the jeweller will allow you to buy the accumulated amount of gold jewellery after paying GST at 3% and the discounted making charges.

Depending on the terms and conditions of the plan, the jewellery may offer you up to 50% or more discount on making charges.

For instance, if you are investing ₹10,000 for 10 months, the jeweller will add ₹10,000 to your account in the 11th month, and you will need to buy jewellery worth ₹1.1 lakh in the 11th or the 12th month, depending on the terms and conditions of the plan.

When is the gold saving scheme useful?

Having some part of one's portfolio in physical gold (preferably gold coins as they have lower making charges) is good for diversification. However, investing too much in gold jewellery may not be the smartest decision in the long term.

Limitations of gold saving schemes

Gold saving schemes can be used only for buying gold jewellery, and may be coins, depending on the jeweller's terms and conditions. You cannot withdraw the accumulated amount. So you would be disappointed in case your plan to buy gold changes during the 10-12 months.

While most jewellers will ask for your Aadhaar and maybe PAN before opening the gold saving plan, this doesn't mean it is without any risk.

Gold saving plans of jewellers are not regulated by the Government. This means you invest in these plans at your own risk and based on the trust you may have in the jeweller. There have been instances in the past when some jewellers vanished with the customer's savings or closed shops.

Gold Mutual Funds and ETFs vs Gold Savings Plan

In the following table, we have compared gold mutual funds and ETFs with the gold saving scheme on different parameters.

*Not all jewellers allow buying coins through their gold savings schemes.

What about SIP in gold mutual funds and ETFs

Investing in gold mutual funds and gold ETFs through SIP may make more sense for investors in terms of liquidity and safety.

Please note that fund houses offer SIP only in gold mutual funds. They do not offer SIP in gold ETFs as they are traded on the stock exchange. However, investors may create a SIP-like structure in gold ETFs using their brokerage accounts that allow automated stock purchases.

Gold mutual funds and ETFs will help investors who want to benefit from rising gold prices in the long run but are not interested in storing physical gold jewellery or coins at home. However, investors should understand the difference between gold mutual funds and ETFs.

Both gold ETFs and gold Mutual Funds have different structures but offer some common advantages over gold saving schemes of jewellers.

Gold mutual funds have gold and gold-related securities, including gold ETFs, mining and refining companies, as their underlying assets. Gold ETFs have physical gold, gold bullion, and futures contracts as their underlying assets.

Further, gold ETFs are listed and traded on stock exchanges, whereas units of gold mutual funds can be purchased from various investment platforms and asset management companies (AMCs).

Typically, gold ETFs are cheaper than gold mutual funds in terms of expense ratio and exit load. ETFs are traded on exchanges on all market open days, mutual funds can be redeemed at the applicable NAV of the day.

Gold ETFs and Gold Mutual Funds are regulated by the Securities and Exchange Board of India (SEBI), thus ensuring transparency. They also offer more liquidity as units of a gold mutual fund and ETF can be sold at any time.

In terms of taxation, gold ETFs are tax-friendly. If you sell a listed gold ETF after 12 months, your profit will be taxed as long-term capital gains (LTCG) at 12.5%. In contrast, if you sell gold jewellery or gold mutual fund units after 12 months, then your gain will be taxed as short-term gain and charged at your slab rate. LTCG at 12.5% on jewellery and gold mutual fund units will be applicable after 2 years.

Both gold mutual funds and ETFs allow you to own gold indirectly. In gold mutual funds and ETFs, you invest in units linked to gold prices rather than buying gold. This helps capture the rising gold prices during the investment period. This may not be possible in some gold savings schemes. However, returns from gold funds and ETFs will depend on market conditions and the fluctuations in underlying assets.