Is it wise to include MF in Rajiv Gandhi Eq Savings Scheme?
Financial exuberance and innovation has not only made the world of investments complex, but also left investors in dynamic environment. While galore of newsflashes released on policy initiatives and other issues, which stalwarts of the finance industry try to be abreast with; investors are often left confused in the maze of information.
The story of Rajiv Gandhi Equity Savings Scheme (RGESS) isn't any different. Right since the time the Government proposed the introduction of a tax rebate under RGESS, there has been host of information disseminated by the press. With lack of clarity right since the proposal stage, information has moved back and forth, often confusing investors on how the tax benefits would be passed on to them.
It is noteworthy that earlier RGESS was proposed to allow income tax deduction of 50% to new retail investors who invest up to Rs 50,000 'directly in equities' and whose annual income is below Rs 10 lakh. Moreover, the lock-in period of the scheme was set at 3 years. Later, the Association of Mutual Funds in India (AMFI) had tried to convince the Finance Ministry to include mutual funds in RGESS. Likewise the capital market regulator - Securities and Exchange Board of India (SEBI), had also pitched for the same in attempt to minimise the risks associated with direct equity investments by investors; but unfortunately, the Finance Ministry rejected the proposal.
Now considering the proposal of AMFI once again, the Government may include mutual fund investments in RGESS, against the backdrop of Prime Minister, Dr Manmohan Singh outlining resolution of problems in the mutual fund industry as one of the priority areas. Moreover, in an aim to make the scheme more attractive for retail investors, the ministry is also considering to reduce the lock-in period to 1 year (from 3 years, as proposed earlier).
PersonalFN is of the view that, if indeed mutual funds are included in RGESS it would aid the mutual fund industry which is paining, since the ban of entry load in August 2009. The move would also be in the interest of investors at large, as herculean task of picking right stocks suiting their risk profile at right valuations, would be entrusted to professional fund managers. Moreover, one would also reap the benefit of diversification available in mutual funds, as opposed to high risk entailed in direct investing in stocks.
However, we think that the Government should leave the lock-in period unchanged to 3 years as proposed, as this in an attempt to attract retail investors, which may induce them to invest for the long-term. Also as per the original proposal for RGESS, the tax benefit is given only to "new investors" - which seems like a once in a life time rebate; this on our view has to be addressed whereby the benefit has to provided not only to "new investors", but existing investors as well who invest in RGESS, otherwise it will be a futile exercise aimed to increase retail participation in the equity markets. Moreover, investors should be allowed to participate in RGESS without enforcing any cap on the income level, as this again impedes deeper retail participation, in era where incomes are rising and more people are being placed in under the "upper middle class" with income of Rs 10 lakh and above.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm