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RGESS: Should you invest directly or through mutual funds?

In the pool of tax savings instrument, financial institutions have added one more option called 'Rajiv Gandhi Equity Savings Scheme' (RGESS). This scheme attempts to encourage first time investors to invest in equity, directly or indirectly, and avail tax benefits. Read this space to know if you should be investing directly or through MF.

April 23, 2013 / 05:31 PM IST

It is a tax saving season in India and institution offering tax saving products have become hyper active now. This year these institutions have a new weapon in their armory. This new weapon is known as,’Rajiv Gandhi Equity Savings Scheme’ (RGESS). Introduced in the annual budget last year, the scheme attempts to encourage first time investors to invest in equity, directly or indirectly, and avail tax benefits. Since there is an option available to invest both directly and indirectly in this scheme, investors face the dilemma of selecting investments through mutual fund versus direct investment. But the before selecting either of the two option, it is better to select eligibility for investments under RGESS.

Check Your Eligibility and Potential Benefits

In order to avail benefits under RGESS, you need to check your eligibility first. Following are the requirements for applying under RGESS:

1. To get tax benefit under the scheme, an investor has to open a new RGESS designated demat account or designate for this purpose his existing demat account, where no trading has taken place before 23 November. He also needs to submit a declaration in Form A, certifying that he has not traded before 23 November 2012, to the depository participant. After receiving form from the investor, the concerned DP will forward form to the depository for verification.

2. The gross total income should be less than 10 lakhs for the investor meaning that people only in 10% and 20% tax slabs can apply.

3. There will be a lock in period of three years in the scheme which means to avail tax benefit; the investor cannot withdraw money from the scheme. However, he is allowed to sell the securities and reinvest the proceeds in the securities eligible under the scheme.

4.  The maximum tax benefit an investor in tax slab of 20% can enjoy is Rs.5000 on an investment of Rs.50000.

Direct Investment versus Investments through mutual funds

Under RGESS there is a limited flexibility in terms of investment. As per RGESS, investments made in shares which are part of BSE-100 or CNX 100 index are only eligible. Additionally listed shares of Navratna, Maharatna and Miniratna public-sector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than Rs 4,000 crores, are also eligible for investment.

If you decide to invest through mutual funds, you end up paying costs which depend upon the slab and can go as high as 3% of the corpus. This is definitely higher than the investment expense that you will end up incurring. With brokerage charges nose-diving, the cost of charges will be less than 3% for you. Additionally since the mutual funds can invest in limited stocks, benefits arising from skills that mutual funds have will get diluted. In the earlier version of equity linked tax savings scheme i.e.ELSS, mutual funds could not perform exceptionally well. Since mutual funds will redeem RGESS scheme after 3 years, there is limited time available to mutual funds to perform, while as an individual investor you can stck for longer period in the investment.

Mutual funds offer one advantage over direct investment since mutual funds are allowed to churn portfolio which individual investors are not allowed for a year under RGESS. Of course, other conventional advantages of investment through mutual fund stay. Since  investors in RGESS will be first time investors, it will be better to start investments through mutual funds in spite of all shortcomings that mutual funds have.

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