There’s a new investment idea in town. The Reliance My Gold Plan allows you to buy gold through “Daily averaging”, by taking a (minimum of) Rs. 1,000 from you every month, splitting into 20 installments, and buying one per day for 20 days.

At the end of the contract term, you can choose to take the gold as coins, or send it directly to a jeweller of your choice (to be converted into ornaments).

This has reached a feverish pitch on advisory channels, with people pushing the product aggressively. Even FundsIndia which tells you this product is better than those schemes by jewellers.

But at Capital Mind, it’s not about the positives. Every one will tell you about the positives. You can get the positives from anywhere. Here’s the “negatives” of the scheme, seen from the lens of someone who isn’t interested in the scheme as an advisor or anything else.

I’m going to look at the scheme as if you could invest in some other mechanism – through a Gold ETF or otherwise – and then use the money at the end of the term to buy gold directly.

It’s expensive Gold!

Reliance’s Gold Price is vastly different from the price that Gold is available at elsewhere, it seems. Here’s the Reliance Plan today:

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Here’s the Mumbai Gold Price in the same deal:

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(Source: MoneyControl)

You pay 8% more!

If you invested that money, the extra 8% will compound and give you even more returns.

Note: Their excuse is that this Mumbai price doesn’t include the cost of storage or entry taxes and what not. Most Gold ETFs include that cost, and they charge less than 1.5% as fees per year, so it really doesn’t justify an 8% markup.

And They Charge You 1.5% Additionally

Reliance charges you 1.5% higher for each purchase. So apart from the above markup you have to pay the 1.5%.

To be fair, this applies only on the purchased amount. In a mutual fund or ETF, you pay an annual maintenance fee on the whole amount of money. To give you an example, if I have 100 grams of gold at Rs. 3,000 per gram in year 1, and I invest another Rs. 10,000 then my incremental charge is 1.5% of the Rs. 10,000 which is Rs. 150; this as a percentage of the Rs. 300,000 is a very tiny 0.05% (per month). 

Still, the savings are tiny compared to the fact that they charge you an 8% markup on the gold price directly.

Oh, if you attempt to exit early, there’s a 2.5% charge on what you didn’t invest.

There are EVEN more charges

At the end, you would think they just hand you the gold. But no.

  • Pay VAT/CST on the Gold which you buy.
  • Then pay coin making charges if you want it in coins. (Small amount here, but about 1% on 5 grams)
  • Pay Delivery charges.

If you don’t want coins, but will choose to make jewellery instead, you get the gold sent to a jeweller. Now,

  • The jeweller buys at lower than market (typically 8% or so, lower than market prices, as a bid-ask spread)
  • He charges you making charges and wastage, which can add up to another 10% of the total cost.

You might say you will incur these costs when buying jewellery anyway. That is true, but:

You can’t choose ANY jeweller

You can only choose the jewellers empanelled with Reliance. This sucks. Because those jewellers will know you have NO CHOICE.

That means they can put high making charges and high wastage and you can’t complain. They can buy the gold from you at a low-ball price and you don’t have a choice.

This lock-in is a huge negative. It basically puts you at someone else’s mercy when it’s your own investment. It’s better to have your money in your pocket and then you can show them the finger if they quote too high a price.

It might violate SEBI norms as an investment scheme, or a forward contract

They buy Gold and the gold is kept in your name with a custodian. They effectively buy it today, and give it to you one year or so later. You pay now, and take delivery one year later.

They have not received any approvals from RBI or SEBI for this product, and claim that it does not come under the SEBI or RBI zone of regulation. However, we are all smart people and understand that this simply means they haven’t got RBI or SEBI registration for such a product. Even NSEL claimed that it didn’t need to get FMC approval (which it didn’t as it was explicitly exempt) and look what happened there!

I am not saying there is a scam in this, but the point is that regulators are very very tough. If RBI or SEBI decides to regulate this business, they would ask very tough questions. In the absence of their regulation any investor must ask for:

  • Audit reports on stock reconciliation with accounts on a monthly/quarterly basis
  • Statement stating that the gold held by the custodian and trustees are not hypothecated with any other party and not “lent out” under any circumstances.
  • Regular stock purity check reports.

In the absence of this, I would be very skeptical of investing in such a plan.

The Good Part: You Can Upload KYC Online

You can actually upload your photo and KYC docs online and get to purchase this product. This is a good feature and I hope this spreads to other institutions as well!

Verdict

There is no verdict. I’m just highlighting the bad parts of the plan (and one good point about online KYC). It makes no sense to me as a financial investor when ETFs do the same thing for so much cheaper.

But for someone who wants to buy jewellery the opinion might be different. While I don’t like the lock-ins, and the high charges, people often face even higher charges going with jewellers directly. I don’t like jewellery and luckily don’t have to bother about it, so it hardly affects my life. But if you asked me, I’d say it makes more sense to buy a Gold ETF and use the proceeds at a later date to buy your jewellery. 

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