Are diamonds a good investment option? (2024)

The recent Ambani pre-wedding bash at Jamnagar may have glittered with celebrities, but the limelight was stolen by diamonds. While billionaires may have the splurging power to hoard diamonds, should you be doing the same? More importantly, are these stones a good investment?

Most industry experts respond with a resolute ‘no’ to the second question. Diamond’s price is not standardised, it’s non-fungible and, even if you do find a diamond in the rough (pricewise), it lacks a healthy secondary market that makes it hard to sell.

“Historically, diamond has not been preferred as an investment asset class,” says Manohar Annappanavar, Associate Director, CareEdge Ratings. “During the pandemic, the negative performance of other asset classes like real estate and equity markets had supported the increased demand for diamonds. This has witnessed a reversal in the recent past,” he adds.

The fall in demand and an oversupply have brought down the prices of these gemstones. After peaking in February 2022, rough diamond prices have been on a declining trend. “Over a period of five years, rough diamond value has depreciated by 13-15% making it a less lucrative alternative option. Polished diamond prices move in line with rough diamond prices but with a lag effect, making it a less lucrative investment option as well,” says Rahul Guha, Director, CRISIL Ratings.

Data shows that both Sensex and gold have beaten diamond by a wide margin in the recent past. Sample this: Rs.1 lakh invested in the Sensex in January 2023 would have fetched you a 25% return by May this year, increasing your investment to Rs.1.25 lakh. The same amount in gold would have returned 23% (Rs.1.23 lakh), but if invested in a rough diamond, the return would have been a negative 20% (Rs.80,000). Not having a very liquid secondary market takes the sheen off diamond even more.

Try telling this to Arpita Chaturvedi, who bought a 1 carat diamond for her daughter when she turned one recently. “Gold was a good gift when I was a kid. Surely my daughter deserves better. I saw diamonds on sale and decided to buy her a pendant, even though she’s not going to use it for years,” says the 36-year-old software engineer from Gurugram. She doesn’t care if it’s a good investment or not. “Some purchases invoke a sentimental value that is unmatched,” she says. Chaturvedi’s purchase was for consumption, not investment. This clarity is essential while buying diamonds.

If you are like Chaturvedi, looking for a golden opportunity to add some bling to your family heirloom, here’s a spoiler—not all diamonds are built equal.

The price of a diamond depends on 4 Cs—carat, cut, clarity and colour. The rarer the diamond, the more expensive it is. “The only diamonds that are worth investing in are the D-Flawless diamonds (highest quality with no inclusions or blemishes visible to the naked eye) over 5 carats,” says Dana Auslander, CEO and Founder of US-based Luxus, an alternative asset manager that allows fractional ownership of diamonds.

“The fancy coloured diamonds—pink, blue and, in some cases, yellow—are very valuable. However, it’s very important to get them at the right price. You have to be careful about how you invest in them,” adds Auslander.

Paul Zimnisky, a global diamond analyst, concurs. “The diamonds that have historically done well as an investment are only the ones that are very high-end—a pink or a blue natural diamond, or one that’s unusually large and of very good quality. Also, it has to have provenance,” he says.

Sparkle losing out to sheen
Even as gold prices have surged in the past year, diamond has tumbled.

However, even the luxury thesis of ‘diamonds are forever’ is being challenged now with the explosion of lab-grown diamonds (LGDs). These synthetic gemstones are visibly indistinguishable from natural diamonds and come at a fraction of the cost.

“Affordability, sustainability, and similarity are the key factors leading to a surge in demand for the lab-grown diamonds, especially in the 1-3 carat segment of natural diamonds, thereby changing the consumption pattern of diamond as a whole,” says CareEdge’s Annappanavar.

Diamond exports take a hit
Cut and polished diamond exports have fallen both in value and volume.

“With essentially the same chemical, optical and physical properties, and crystal structure as natural diamonds, at a fraction of the price, has led to a significant double-digit growth of lab-grown diamonds in the US. At present, the value of LGDs is less than 1/10th the price of natural diamond of similar quality,” he adds.

Did Chaturvedi take into account the potential savings she could have made had she gone for a lab-grown diamond? “No. That defeats the whole purpose of buying a diamond. Something that’s made in a lab can be mass produced and will lose its value over time. Diamond’s value proposition is that it’s rare and has a store of value, and LGDs turn that logic upside down,” she says.

As far as investing is concerned, Zimnisky sums it up well. “Diamonds are fit for very wealthy individuals, who are looking for exotic ways to diversify their investments. I would put it in the category of art collection or exotic cars. It’s very complicated to invest in these and should be left to the experts,” he says.