India is one of the largest importers of gold and the craze for yellow metal has not subsidised despite its price hitting a high recently.
Gold polishes up its returns
With the marriage season setting in, banks have started to offer personal loans to investors wanting to buy gold jewellery, at interest rates ranging from 15-30 per cent.
Does taking a loan to buy jewellery make any sense? Not really due to two reasons.
Gold and Silver rates
One: While gold has managed to improve its returns in the past five years and has generated about 15 per cent annualised return from 1999-2009, it has seen its returns dip to as low as less than 5 per cent in some periods.
You may be interested to know that gold prices hovered at $850 an ounce in 1980. It is now just at over $1,000 an ounce. This data clearly shows that unless you buy on dip the returns can be abysmally low.
Two: Unlike stocks, bonds or even real estate, gold does not bring in any regular income or returns to its holder. In fact, holding gold jewellery will carry a cost, if you have to house it in a bank locker.
Instrument of Choice
To incur interest outgo of 15-20 per cent per annum while buying such an asset cannot be a healthy trend in wealth creation.
One more point worth remembering is that if you buy gold bars from banks, the cost is higher due to purity of the metal. As banks don't buy back the gold, you ought to sell it to your jeweller. He will take the gold at the market price that will be far below the bank's selling price.
Given this backdrop, you should note that banks are offering loans when gold prices are close their record highs.
Even assuming you buy gold coins, bars or biscuits with that money and gold continues to deliver a 15 per cent return, your investment will take years to break even.
Under the circumstances, using the "chit fund" route with gold jewellers makes even less sense as the returns offered by the leading jewellers are less than 10 per cent.
Typically, if an individual saves Rs 3,000 a month at the end of 18 months the maturity value will be Rs 57,850.
The catch here is that if you think that gold prices are ruling high and postpone the purchases, the maturity proceeds may not earn any interest.
So if you want to celebrate Dussehra or Diwali by purchasing gold, do so through surplus money you have saved from other options.
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If you have to make those purchases for a wedding, instead of taking personal loan, consider lower cost borrowing options such as pledging your national saving certificates or life insurance policy, where you can take loans at an interest rate of 10-12 per cent. In those cases, if you pre-close your loans there will be no penal charge.