Buy gold coins this Dhanteras, but don't mistake it for an investment

But if you’re riding this rally through gold coins or jewellery, your net returns may leave you disappointed as significant embedded costs make these the lowest-yielding forms of the metal.

“Physical gold coins are seeing heightened interest amidst the ongoing rally in gold prices. However, physical bullion carries making charges, storage costs, quality concerns, and other frictions that erode returns,” explains Dev Ashish, a Sebi-registered investment advisor and founder of StableInvestor.com.

Many households accumulate gold gradually, buying 1, 2, or 5 gram coins each Dhanteras, blending a festive ritual with a practical wealth-building exercise. The catch, however, is that when you buy gold in coin form, you don’t fully capture its on-paper returns.

Coins to jewellery: a costly conversion

The gap between market-price appreciation and the value you actually realise can be significant as the value of accumulated coins can only be realised by either selling them for cash or using them to make jewellery. Both routes eat into your returns.

First you shell out 4-5% in making charges plus 3% GST on the coins, increasing your cost of purchase. If you use the coins to make jewellery, the conversion cost is steep. As a first step, you lose the making charges and GST paid on buying the coins. Second, you once again pay making charges for ornaments, which ranges from 12-30% at reputed chains. You’ll also pay 3% GST on the total value of the ornaments. Smaller jewellers may quote lower making charges, but it still works out at 10-12% and and you can’t be certain about the purity of the gold, especially if it’s not hallmarked.

These deductions substantially reduce your effective return, turning what looked like a 20% compound annual growth rate (CAGR) asset into something far less attractive.

Let’s illustrate this with an example.

Say you bought one 1 gram of 24-karat gold coin every Dhanteras for the past 10 years. Assuming 5% making charges plus GST, you paid about ₹48,386 in total. The current total market value of these coins, based on gold prices as of 9 October is around ₹1.24 lakh.

Now, say you decide to convert these coins into jewellery, which involves 15% making charges. You will spend about ₹22,806 (15% of the current price of gold, which is ₹1.24 lakh, and 3% GST on cost of the ornament) in additional costs, reducing your effective internal rate of return (IRR) to around 15%.

If you had instead invested an amount equivalent to 1 gm of gold in a gold ETF every Dhanteras for 10 years, the IRR would be 20%. This return is in line with gold’s actual price movement, since ETFs reflect spot gold value minus minimal management costs. More importantly, ETFs offer complete liquidity, transparent pricing, and zero making charges or purity concerns.

Can you cash out coins?

Your second option is to sell the coins back to a jeweller. However, this isn’t as straightforward as it seems. Most large jewellers only buy back coins that were originally sold by them, and even then they typically deduct around 3-5% and pay 97-95% of the prevailing gold rate. More importantly, if you bought coins online from a specific brand but live in a city where it doesn’t have an outlet, you’ll likely have to sell to a local jeweller who will often take a bigger cut, sometimes up to 10%.

In the example above, if you are able to sell the coins back at a jeweller charging a 5% cut, your IRR works out to 18.5%. These returns may not look bad at first glance, but this is a best-case scenario where the jeweller is willing to buy back all your coins with a modest cut.

Some large jewellery chains even impose buyback limits. For instance, Candere by Kalyan Jewellers accepts coin buybacks only for invoices valued below ₹2 lakh. “This condition applies to the lifestyle jewellery brand Candere due to their typical ticket size,” said Ramesh Kalyanaraman, executive director, Kalyan Jewellers.

Coins are festive, not an investment

Buying a gold coin on Dhanteras is deeply symbolic as it represents wealth, prosperity and good luck. Young consumers are increasingly turning to gold coins, drawn by their easy availability on online platforms like Amazon, Flipkart, Blinkit and Instamart, where frequent discounts and credit card cashback offers and easy payments attract plenty of demand.

There’s nothing wrong with keeping the tradition of buying gold on Dhanteras alive, but it’s worth recognising it for what it is—a cultural decision and not a financial one, experts said. “Gold coins have strong sentimental and festive appeal but they shouldn’t be mistaken for an investment. They are ideal for gifting and festive occasions, whereas gold ETFs are better suited for investment and portfolio diversification,” said Vikram Dhawan, head, commodities and fund manager, Nippon India Mutual Fund.

If your goal is to invest in gold, ETFs and sovereign gold bonds (SGBs) offer direct exposure to gold’s price without the friction of physical handling or resale. Even if the ultimate goal is to buy jewellery, you can simply sell your units and use the cash to buy jewellery, saving on making fees and GST.

A word of warning: don’t overpay

While gold is an important part of any investment portfolio, given the current prices it’s important to ensure you’re not buying at a steep premium. “Gold ETFs have been a viable option for some time but due to recent price rise and occasional supply-demand imbalances in the secondary markets, many of these trade at premiums above their net asset values (NAVs). The story is the same with SGBs now. The absence of new SGB issuances has created a supply shortage. Consequently, older SGBs trade on the secondary market at significantly high premiums of 10-15% above their intrinsic value. Gold ETFs, on the other hand, are at 1-3% premium at most times, which is not significant,” said Dev Ashish of StableInvestor.com.

ETFs are a highly liquid instrument, unlike gold coins whose liquidity depends on jewellers agreeing to buy them back. “Gold ETFs are backed by bullion held in vaults and trade freely on exchanges. At most, short-term supply disruptions can cause a premium or discount between the ETF’s traded price and its NAV, but that’s reflective of the underlying physical market, not a liquidity issue,” said Dhawan of Nippon India Mutual Fund.

So this Dhanteras, bring home a gold coin as a mark of prosperity, but don’t mistake it for an investment. And if your goal is to eventually convert these coins into jewellery, it’s wise to buy them from the jeweller where you plan to shop later, rather than chase online discounts. That way, you’ll be able to use every coin seamlessly and keep additional charges to a minimum when the time comes to turn them into jewellery.