Should An Investor Consider RGESS? A PhD in Economics, Dr Pothen flagged off her career as an academic associate with the Indian Institute of Management, Ahmedabad followed by a stint at Pioneer Investcorp Ltd. In her current position, she heads Research at Fundsupermart.com.We have reached the end of the financial year, also considered as the tax-saving season for ourinvestors. It is during this time that we get maximum queries on the popular tax saving instrument inthe mutual fund space which is the Equity Linked Savings Scheme (ELSS). However, this year seems tobe different with all factions of the industry having diverted their time and energy to a scheme calledRajiv Gandhi Equity Savings Scheme (RGESS). This brainchild of the UPA Government, launched in theBudget of 2012-13 to propagate financial savings among retail investors, is the topic of discussion inevery nook and corner of the industry. Investors have already been bombarded with a number ofarticles in the media. Financial experts are talking on the different aspects of this scheme and fundhouses are also doing their bit to create awareness on the same before the closing of the New FundOffers (NFOs).The aim of this column is to just pen down a few thoughts on RGESS while leaving it to the investors toread the finer prints of this scheme and accordingly take the right decision to invest in the same or not.When Pranab Mukherjee announced the launch of RGESS in the last budget, I had written my views onthis scheme in moneycontrol.com which read: Another measure that was announced today was thelaunching of Rajiv Gandhi Equity Saving Scheme, which allows a tax deduction of 50% to investors whoinvest upto INR 50,000 directly in equities, having a lock-in period of 3 years. However, the catch in thisscheme is that it is aimed at investors whose annual income is below INR 10 lakh. We are of the viewthat Mr. Mukherjee shouldnt have kept a maximum limit on annual income as an investor who isearning less than INR 10 Lakhs will not want to play in equity markets, in a scenario wherein highinterest rates and inflation are hurting him on a daily basis.The governments decision to launch this scheme was to encourage the flow of savings into financialinstruments and improve the depth of capital markets. The intention of the government seems to be inthe right direction as we are talking about a country where even today more than 50% of the financialsavings of the household sector flow into bank deposits while another 20% goes into life insurancefunds. The rest of the surplus is allocated into currency, provident and pension funds, investments ingovernment securities, small savings and shares and debentures. The frightening figures are there forall to see in RBIs Annual Report.
The Ministry of Finance came out with the notification on November 23, 2012 regarding this scheme andby then the term equities was extended to include Exchange Traded Funds (ETFs) and Mutual FundSchemes. This was a good initiative from the government as a first-time retail investor would definitelyfind it difficult to fish in the wide ocean called markets and scout for the right stocks. However, I am notin sync with the policymakers regarding the definition of first-time investor towards whom the scheme istargeted. My main contention here is that this scheme is actually aimed at investors who do not have ademat account or an existing demat account holder with no transactions till the date of notification. Inaddition, a new retail investor could even be a second/third demat account holder. The flaw here is thatif the investor does not have a demat account but has been transacting in mutual funds through offlineor online platforms, then he/she cannot be considered as a new entrant into equity markets. If the aimof the government is to divert untapped surplus savings into the capital market, then RGESS in itscurrent form will not serve the purpose for which the scheme was launched.Another observation that needs a mention here is the liberty given to first-time investors to invest in thetop 100 stocks at NSE and BSE, any of the public sector enterprises which are classified as Maharatna,Navaratna and Miniratna, FPOs, NFOs, and even unlisted equity shares. A new investor will definitely nothave the capability to invest in any of them and will require proper hand holding. Hence the best routefor these investors would be through mutual funds. The mutual fund schemes which are compliant withRGESS can in turn only invest in those stocks either from BSE 100 or CNX 100 or any of the othersecurities mentioned above. My fear is that in their enthusiasm to launch RGESS, the fund housesshould not replicate the already existing large-cap or multi-cap funds in their own stable.Finally, unlike ELSS, this scheme does not have a fixed lock-in-period for 3 years. Instead, the schemewill have a fixed lock-in period for a year and 2 years of flexible lock-in period. During this period, theinvestor can trade the eligible securities and can claim tax benefit, provided the demat account iscompliant for a cumulative period of minimum 270 days during each of the 2 years of the flexible lock-inperiod. The government is actually forgetting the fact that this scheme is for new investors who shouldfirst feel confident about the equity markets rather than encourage them to become active traders fromthe second year onwards. The aim should be to make investors understand the advantages of long-terminvestments so that they dont follow the herd whenever the markets are in a dizzy phase. Hence,instead of a complicated lock-in period, the government should have gone in for a fixed lock-in period of3 years.My take on RGESS is that this scheme requires a lot of modifications so that it can serve the purpose forwhich it was launched. Like all market participants I hope that Team Chidambaram will be able to do thebalancing act to make this scheme more effective. In the current context I would advise this scheme toall those investors who want to take advantage of the little tax benefit that it promises. Investors shouldalso look at the mutual fund route rather than going in for direct equities as this will relieve them from alot of tension which they will have to take, so as to be compliant with this scheme.DISCLAIMERiFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any ofthe Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or bematerially interested in any such. Any advice herein is made on a general basis and does not take into account the specificinvestment objectives of the specific person or group of persons. Past performance and any forecast is not necessarilyindicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fallas well as rise. Opinions expressed herein are subject to change without notice.