Solid as a rock?

Diamonds can be a sound financial investment if you are willing to be patient

A diamond, they say, is a girl's best friend. DeBeers would also have us believe that a diamond is forever. But is there more to a diamond than its beauty? Do you buy a diamond simply for its sparkle or is it also a sound financial investment?

"If you buy a good quality diamond that has been certified by the Gemological Institute of America (GIA), it is a very good investment as the value appreciates significantly over time," says Upendera Kumar Sharma, chairman and managing director, Suryansh Diamonds Pvt Ltd, a Delhi-based diamond boutique.

Sharma himself offers a 100 per cent buyback guarantee and if a diamond is sold back to him after five years, he guarantees a 50 per cent appreciation in value.

Hence a diamond bought for Rs 1 lakh today will fetch you Rs 1.5 lakh after five years. That's an annual return of 10 per cent.

Considering that you are guaranteed this return, the investment makes sense as the returns are higher than any safe investment option such as a bank fixed deposit or small saving schemes like NSC or PPF.

However, this should not mislead you into believing that diamonds are a great investment option. Suryansh is one of its kind in the country and in most cases, when you go to sell a diamond, it is totally your own bargaining skills which determine its price.

This is because in India the systems are still not in place and there is no standardisation when it comes to the price of diamonds. Diamond prices the world over are determined by the Rapaport Diamond Report which officially lists wholesale diamond prices in the New York market.

This, at least, gives you a fair idea of what the price is likely to be "" both when you are buying a diamond and also when you are selling it.

The price of a diamond basically depends on the 4 Cs "" cut, clarity, colour and carat.

To this, diamond experts believe, one must add certification. Only diamonds that have been certified by independent organisations such as the GIA or the HRD have any real value in the resale market. These institutes only certify loose diamonds.

The certificate issues a grade indicating the physical properties of the diamond at the time of evaluation.

The certificate retains its value over a long period of time, assuming the diamond does not chip or is not otherwise altered. So when buying a diamond, you must insist on such a certificate, for that is your only guarantee to a quality stone.

Also, remember that to get a good return you have to make a decent investment. So while the return on a diamond of one carat and above may be between 10-15 per cent annually, a smaller diamond's value may actually depreciate in the short run.

When buying a diamond from an investment point of view, you must buy either a good quality (VVS1-VVS2), good colour (between D and M) one-carat plus diamond, or one of the rare fancy diamonds such as the pink or blue diamonds.

"Buying a poor quality, cheap diamond does not make sense financially as these are not rare enough to be considered an investment except in a highly inflationary market. Even then, prices of these stones may drop dramatically when inflation is curbed," says a Mumbai-based diamond trader.

If you can lay your hands on a natural coloured diamond such as yellow, pink, blue, green, purple and red, grab it and hold on to it. For that is one financial investment you will not regret.

These diamonds have the best appreciation track record. Since serious recording of prices started on these stones around 1970, they have never fallen in price. In recessions, they tend to move laterally and in healthy economies or inflationary times they tend to move up in price (see box).

Also, to get good returns, you really need to hold on to your stone. You can't really expect to make a good profit if you decide to sell it in a couple of years. The idea is to buy it, enjoy it and then, after a few years when the price has appreciated significantly, sell it.

Again, when looking at diamonds as an investment, remember that it is not a conventional investment. Yes, it makes a lot of sense if you suddenly have to flee the country "" just sell everything and convert it into diamonds. You will have assets worth millions in your pocket.

But if you are not planning to do that, bear in mind that top quality diamonds are more liquid than real estate but less liquid than stocks or gold.

It is not easy to find a buyer for your stone who is willing to give you the right price for it. So if you have to sell in case of an emergency, more likely than not, you will get a lower price for your stone.

But if you hold on to it till you find the right buyer, a diamond may just be the right investment option for you.

On a high
How prices of coloured diamonds have appreciated since 1970

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• Blue diamonds 100% every five years
• Pink diamonds 100% every six to seven years
• Yellow diamonds 100% every eight to ten years