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Key pointers while investing in Rajiv Gandhi Equity Scheme

Rajiv Gandhi Equity Saving scheme was introduced in the budget (2012-13) this year by the Finance Minister. This is first of its kind scheme in India which allows the retail investor to invest upto Rs.50, 000 directly into equity shares and avail tax benefit on 50% percent of investment made directly into equity shares. Some of the conditions put under the scheme to avail tax benefits are

1) The investor should have income of less than Rs. 10 lakhs in a year,

2) The benefit under the scheme will be given to the first time investors into equity market only,

3) investments will be subject to lock-in period of three years and 4) If the assessee has claimed and has been allowed a deduction under this section for any assessment year in respect of any amount, he shall not be allowed any deduction under this section for any subsequent assessment year. This is as per Section 80CCG.

This scheme has been subject of heated discussion since the time it was introduced in the budget. Many analysts and experts have pointed out that exposing retail investors to direct equity investment is a risky proposition.  Many fund managers have also criticized the idea saying the scheme won’t be in the interest of retail investors. SEBI's Chairman U.K. Sinha has also expressed his view that the scheme should be routed through Mutual Funds. While concerns seem to be valid to some extend, the fact remains that many of the mutual funds which run equity linked savings scheme (ELSS) have also not performed well. Some of these funds have even failed to beat the benchmark against which they operate. So routing money through mutual funds will not necessarily result into wealth maximization. Additionally, government is going to allow retail investors investment into selective stocks only which will be based on some indices (details awaited).

Since retail investors have been allowed to invest in equity directly, what should retail investor do? How can a retail investor maximize return under the scheme, given the limitations that an investor has in terms of knowledge he possess of stock market. There is a high likelihood that retail investors may get driven by tips rather than fundamentals of the stock. In order to overcome such challenges, retail investors can use common sense approach to investments. Following aspects need to be evaluated by an investor before selecting a stock:

1) Look at the past track record: Retail investors should select stocks which have performed well in the past. The performance gets manifested in profit made by the company and increased in share prices. In order to select such stocks, an investor can zero down to Sensex or Nifty stocks. The stocks in these indices are included only after they meet rigorous criteria set by stock exchanges. The most important aspect of these stocks is that they are subject to market scrutiny and hence investors continue to get information through media. So it will be very easy to identify any adverse event related to these companies.

2) Dividend Analysis: Retail Investors can analyze dividend payment in order to select stocks. Some stocks pay regular and substantial dividend and can help retail investors build wealth. One such stock is ONGC. ONGC has been paying regular dividend during last ten years. Let us look at the table which indicates dividend given by ONGC during last eleven years:

Year Face Value Dividen Rate (%) Dividend Amount Dividend Reinvested @10%
2000-01 10 110 11 31.38
2001-02 10 140 14 36.31
2002-03 10 300 30 70.74
2003-04 10 240 24 51.45
2004-05 10 400 40 77.95
2005-06 10 450 45 70.86
2006-07 10 310 31 49.93
2007-08 10 320 32 46.85
2008-09 10 320 32 41.26
2009-10 10 330 33 39.93
2010-11 5 175 8.75 9.63
        Total=526.29

 

 

 

 

 

 

 

 

 

 

ONGC, as a stock, has given dividend which has present value of Rs. 526 during last 12 years considering that dividend was reinvested by the investors and it fetched 10% return per year. This is not a recommendation for ONGC stock but an indication of the fact that how dividned can result into creation of wealth. Such stocks can be useful for investors as they provide regular cash flow and help maximize wealth for investors. Since high amount is paid as dividend, the impact of lock-in also gets diluted as investors continue to regular cash flows.

3) Select stocks from stable and growing sectors:  There are some sectors which have shown consistent growth over a period of time like FMCG (Fast moving consumer goods), Pharma and Automobile. It is better to select stocks from these sectors, if an investor wants regular but stable returns. Even during recessionary period these stocks have shown stable growth in India.

Rajiv Gandhi Equity savings scheme is not just a tax saving scheme, it offers an opportunity to retail investors to be part of equity culture. No wonder government wants investors to invest on their own. Retail investors should take this opportunity to rise to the occasion and enhance their knowledge of equity products and benefit from long term investments in equity.

- Vivek Sharma

SENSEX   | NIFTY