Can your investments under RGESS really be safe?

Prevention is better than cure. This is one of the most largely followed idioms by us. Right from our daily activities like stepping out of the house on a rainy day, maintaining cleanliness in the house, incurring expenses, etc. to taking an important business decision or providing an investment advice, we most of the times tread with caution. This cautious approach is adopted as it is important to take proper steps or measures to prevent a bad consequence or bad thing from happening, rather than taking corrective steps after some bad event has taken place.

Now take the case of Rajiv Gandhi Equity Savings Scheme (RGESS), which has been introduced as a tax saving scheme for the first time for novice investors, is going through multiple changes before any concrete decision is inked for it. Before framing the final guidelines, the Finance Ministry has addressed to the liquidity issue or the investment management issue and now contemplates on the safety issue of the first time investors under RGESS who are seeking to benefit from this once in a life time tax-saving opportunity.

In order to device safety measures for new investors investing in direct equity through the RGESS, the draft guidelines indicate that the investors under RGESS will be allowed to invest in Maharatna, Navaratna, and Miniratna shares, besides the top 100 shares of the equity markets - commonly known as large caps. The argument for proposing investments only from the large caps and PSU domain is, not only to provide security but also ensure liquidity at the time of entry and exit from RGESS.

It is noteworthy that RGESS aims to benefit small investors by incentivising them with a 50% tax-break on their investments upto Rs 50,000. Small investors, according to the draft guidelines are those individuals whose income is below Rs 10 lakh per annum. Moreover, the scheme is only available to new investors who are entering the market for the first time to invest in shares of companies on the stock exchange. Hence, this benefit is like a once in a life time benefit. And in the absence of any mention as to who will manage the investments in direct equity under RGESS, it will be left to the individual investors themselves.

We are of the view that, although the Government has tried to infuse safety by mandating individual investors in RGESS to invest only in PSU and large cap stocks, small investors who are ill-equipped to invest directly into stocks may not be protected at all. This is because although these large sized stocks may be construed to be safe generally for the investors; in the absence of detailed study and prudent research support, even over a 3 year time frame (i.e. at least until the lock-in period of RGESS) they may not meet their objective of creating wealth, and chances of capital erosion aren’t ruled out. It seems that the Finance Ministry is trying to attract fresh funds for PSUs through RGESS by portraying it (PSU stocks) as a safe bet.

It is noteworthy that the volatile nature of equity markets requires professional management in order to make some gains on investment made. And in such a case mutual funds turn out to be good route for novice investors, or those who do not have the adequate resources to study the stocks well. Also, the diversification benefit offered by mutual funds would have enabled reducing the risk involved in the investment.

Thus, despite the safety measures as prescribed by the draft guidelines, we believe that the RGESS in this format can be a risky proposition for small investors.

PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm