There is a common thread running through the spending habits of legendary singer Lata Mangeshkar and Renuka Jagannath, a Mumbai-based housewife. Both share a fervent interest in diamonds. They are part of a growing tribe of faithful.
“Demand for diamonds has shown consistent growth over the past three years, and this year too,” says RK Nagarkar of Tribhovandas Bhimji Zaveri – The Original, a leading jewellery company. But unknown to Jagannath, diamonds pale before gold in terms of investment returns for reasons ranging from ambiguities over pricing to grading and buyback opportunities. Missing price mechanism Diamonds, unlike gold, lack a standard benchmark pricing and are often sold at the ‘asking’ rate.
The Rapaport Diamond Report, an industry publication, outlines the price of diamonds based on the five Cs—carat, colour, clarity, cut and cost. But the price mentioned remains on paper. Jewellers are entitled to a certain discount, which varies. The result is that a diamond ring worth Rs 30,000 at one jeweller could be cheaper or costlier at another.
“Rapaportprice is a loose benchmark. The mean price is based on external conditions such as demand-supply and foreign exchange,” says Vijay Bhambwani, CEO of bsplindia.com, an investment advisory. Diamonds also lack a strong ‘price discovery’ model as they are yet to grow into an investment option like gold, which is lapped up during marriages or sold during crises.
The lack of “a standardised benchmark for pricing is a deterrent to the industry”, says Anuj Rakyan, managing director of Ananya Jewels , adding that efforts to establish a daily pricing index similar to that of gold by a few experts fizzled out. Grading difficulties Diamonds are best graded in raw form. Once turned into jewellery, it’s hard to detect their colour and clarity.
“Even when a lab grades a diamond, the certificate comes with a disclaimer that the actual colour and clarity may differ,” says Rakyan. The completely colourless variety is graded from D to V, with D being the best. As regards clarity, the clearest diamond is the rarest and hence, the costliest. Such a diamond is graded as internally flawless (IF) while less superior varieties have grades of very very slightly included (VVS1 and VVS2), very slightly included (VS1 and VS2), slightly included (SI1 and SI2) and imperfect (I1, I2 and I3).
“As one moves across the grades, the prices may rise by Rs 600-700 per carat. But it’s difficult for a customer to check these aspects over the counter,” says Mehul Choksi, chairman and managing director of jewellers and diamond merchants Gitanjali Group . Selling is no picnic Many jewellers are hesitant to buy back a diamond because they may be unable to cough up money.
“Even after ascertaining the value of a diamond, I may be unable to buy because I may not have [so much] cash at that point of time,” says Rakyan. There are also concerns over quality. Well known retailers such as Tribhovandas, Tanishq and Gili refuse to buy diamonds not sold by them for this reason. They promise to buy back their diamonds at 85% of the prevailing rates minus the making charges.
That shrivels to nearly 75% in the case of smalltime jewellers. Small- and medium-sized jewellers do accept all diamond jewellery, but at a huge discount. “The market was flooded with American diamonds of poor quality two decades ago. Jewellers have also encountered stunningly crafted fake diamonds that are difficult to identify even with several lab tests,” says Bhambwani.
Adds Kartik Jhaveri, a certified financial planner, “This is a business based on trust. Certain merchants don’t even offer a quality certificate. Unless you know the diamond merchant and are aware of the nitty-gritty of the business, don’t step into it.” The bottom line is that if you are buying diamonds for their ornamental value, be warned of these disclaimers.
If investment is on your mind, think twice, given the ambiguity and lack of standardisation in buyback deals. “For an investment vehicle to be successful, investors should know that their capital is safe, they can withdraw a certain sum or the entire corpus at any point of time. They should also be able to track prices daily and trade on a regulated platform. Diamonds must fulfil these criteria to qualify as an investment option,” says Bhambwani.
Source: Economic Times
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January 20, 2011