Why gold MFs outshine gold accumulation plans

Chirag Mehta | Updated on December 08, 2019

They enable systematic investment similar to gold- accumulation plans and are relatively risk-free

Buying gold jewellery was an expensive deal for Mansi, like it is for most of us.

With gold prices at elevated levels of late, a lump-sum purchase was out of question.

She was looking for small, staggered purchases. That’s when she learnt about the gold-accumulation plan offered by a neighbourhood jeweller.

Most of such plans convert fixed deposits into gold at maturity.

All it required was setting aside some amount each month, for the next 10 months, in EMI style, for the final purchase.

But the credit risk — the capacity or willingness of an entity to meet financial commitments as they become due — tends to get ignored by unsuspecting consumers, till the time it all goes downhill.

Gold-accumulation schemes are like working capital loans for the jeweller, and the bonus contribution he pays at the end of the accumulation phase is similar to paying simple interest on the money you’ve paid him over the last few months.

The issue is you can never be sure whether the jeweller has kept enough gold as deposit equivalent to the money deposited, as he could also be using the cash for other business expenses.

In fact, the jeweller might also use fresh inflows in these gold- accumulation schemes to honour existing scheme commitments.

Hence, there is no regulatory protection, whatsoever, for small depositors in these gold schemes if a jeweller goes bankrupt.

So, there is only one way to approach systematic gold purchases till these are better regulated — caveat emptor (buyer beware).

Exploring better alternatives

The traditional view is that gold in the form of jewellery or coins is best suited for adornment and gifting, while financial forms such as gold funds/ETFs (exchange-traded funds) are preferable avenues for investment.

However, there is a third way to approach this: systematic investments over time in the financial form (gold savings funds).

Gold savings funds are a logical extension to gold ETFs. Those who want to invest in gold at regular intervals in a systematic manner can consider these funds which operate like a fund of funds and invest their corpus in an underlying gold ETF. These funds not only have the systematic investment benefit of a gold accumulation plan, but also offer much more.

Small, systematic investments: Since they offer SIP mode of investing, they provide you with the benefit of rupee-cost averaging and enable investors to save and invest regularly with amounts as low as ₹500 and quantities as less as half a gram. You actually lock in the gold price and become an owner of the attributable gold equivalent to the amount of investment.

Price efficiency: The price in gold funds is locked in as per wholesale rates prevailing on the day of the instalment. This is the ideal way as it averages out your cost as you pay each instalment.

In contrast, in most gold-accumulation plans, the price at which you would buy gold will be the one prevailing at the end of the term.

Assured purity and physical backing: All units are backed by 24-carat physical gold.

Liquidity: Gold-accumulation plans are highly illiquid; some may not even allow closing before the end of the term. Even if they do, you will lose your bonus instalment. Also, you can only buy gold jewellery with the accumulated amount and not use it for any other purpose, in case of an emergency. In contrast, you can sell your gold fund units on any given day and use the proceeds in any way you wish.

Safety: Gold is held in secured vaults with an insurance cover. The gold is held by a trust where investors are the beneficial owners, thereby mitigating any chances of default

Regulation: As mutual funds are regulated entities, you can be assured that your money is being used for the defined purpose and not redirected.

The writer is Senior Fund Manager, Alternative Investments, Quantum Mutual Fund

Published on December 08, 2019

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