while gifting is a personal choice, it should not be confused as an investment. Diamonds are increasingly gifted in engagements, birthdays and anniversaries. There are reasons why diamonds don’t qualify as a good investment, here’s why.
1.Falling prices: – Heres what I found whilst checking data on historical prices of diamonds. Rough diamond prices have been falling globally since 2011. In the past five years, Diamond index is down by 11%, according to International Diamond Exchange (IDEX). Also at the retail end, diamonds prices have fallen in the last decade. However, it has differed widely depending upon its grades. Diamond grading is done on the parameters of 4Cs – Colour, Clarity, Cut and Carat weight.
In short, investing in diamond would have eroded your wealth in the past decade. Gold in comparison did relatively better – it was up 84% during the same period, while equities (Sensex) gave a return of 141 percent. Broadly this is how Gold has performed against Indian equities over the last 10year period:
Gold – 3-4 % p.a.
Equities – 10-11 % p.a.
2. Liquidity: Unlike gold or silver, which has a very liquid secondary market, it is not easy to sell diamonds. Except for some large retailers, there are no transparent mechanisms of pricing or a system of buy-backs. A precious metal like gold is fungible and liquid. It could be stored and sold anytime in the market. However, that couldn’t be said about diamonds.
3.Buy/Sell Disparity: When you buy diamond jewellery, you don’t get diamonds for its entire value. For instance, on purchasing a diamond worth Rs 50,000, about 17 percent goes towards gold charges (as part of jewellery), another 8 per cent towards making charges and another 3 percent as GST. So, effectively, only 72% of the purchase value is allocated towards buying diamonds.
Making charges are a form of mark-ups. So, when you sell diamond jewellery, you will get value only for diamond and gold (mostly at a discount to current rates), while foregoing making charges and government taxes. This will further dent diamond’s price performance.
4.Better only when Bigger!! – A one carat solitaire (single diamond piece) ring is more expensive than a 25-stone cluster ring. That’s because larger stones are rarer than smaller stones of the same quality. Moreover, if you are in the habit of buying many diamond rings – probably you stand to lose. Diamond pries usually rise in proportion to their size. Some experts in fact advise buying diamonds upwards of a carat. However, that might not suit everyone’s pocket.
Its natural human tendency to fall to the “Temptation” trap when we see our friend / relative flaunt their new diamond jewellery. Do take an informed decision and abstain from thinking of the purchase as a good investment bet. So, buy diamonds only for once-in-a-lifetime gifting and nothing more. Adopt equities or other financial asset classes for meeting your investment goals.
Author: Mr Nirmal M Jain | Mr Nirmal M Jain is a Co-Founder at HappyWise Financial Services. He has helped over 100 Families over the last 15 years of his services in the Financial Planning Sector. He has been a mentor to several people to help them better understand investments, stocks, mutual funds, financial planning, personal finance and above all his favourite term “The Power Of Compounding!”.