Insights

What the Rajiv Gandhi Equity Savings Scheme holds for MF investors

September 24, 2012 .
Vidya Bala

The Finance Ministry, last week, announced the inclusion of mutual funds and exchange traded funds in the Rajiv Gandhi Equity Savings Scheme (RGESS) – a measure aimed at improving the equity investing culture in the country.

While the rules and procedures regarding mutual fund investing under the scheme await further clarity, here’s a first take on what it means for potential mutual fund investors:

  • The scheme is meant for ‘first time’ equity investors. On the face of it, it appears that if you are an existing investor the scheme is not available to you. But this may be tweaked when the SEBI finalises the rules of the game.
  • RGESS is available only for investors with an annual taxable income of less than Rs 10 lakh. Clearly the scheme aims at tapping the middle income class, which may not have invested in equities. Investing in installments, within a year, is also allowed, to aid small investors.
  • The most important incentive under RGESS is a tax deduction of 50 per cent on the maximum investment of Rs 50,000 from your annual income. That means you can get Rs 25,000 of deduction when you invest in eligible equities for the first time. Unlike Section 80C of the Income Tax act, where certain investments (including tax-saving mutual funds) get deduction of up to Rs 1.5 lakh  every year, the scheme will offer only an one-time incentive. Why? Because the scheme is only for first-time investors and you will cease to be one, once you invest.
  • A majority of the current universe of mutual funds may well not be available to invest under this scheme. Only those funds which invest in the eligible stocks prescribed under this scheme will be brought under the scheme. What are the eligible stocks? Those stocks that are listed under the BSE 100 index or the CNX 100 and stocks of public sector navratnas, maharatnas and miniratnas are eligible. Simply put, the funds should have a portfolio of index funds with some leeway for holding non-index PSU stocks.
  • Lastly, there is a lock-in period of three years, with an option to trade after one year, subject to restrictions. Your portfolio value over the subsequent two years should be maintained at –  the tax claim you made or the value of your portfolio just before you make a sale, whichever is lower. This level is to be maintained for at least 270 days in a year.  The tax claim has to be foregone if you break this rule.

To satisfy the RGESS criteria in its current form, mutual funds may have to come up with new products to cater to this scheme. Currently, most of the funds that invest in the eligible list of stocks are open-ended and allow withdrawal anytime. A good number, barring index funds and ETFs, invest well outside the top 100 stocks.

Also, if tax benefit is a criterion for investing, the current ELSS schemes provide deductions, that too for every year of investment made. In its current form, RGESS may woo first-time equity investors. But it does not offer much for investors looking to build long-term wealth by investing in mutual funds. The benefit of the one-time tax deduction (at just Rs 2,500, if you are in the 10-percent tax bracket) may be outweighed by the returns that an actively managed diversified portfolio of mutual funds (outside the RGESS) may generate.

Comments

Get FundsIndia’s articles delivered straight to your inbox!

Enter your email address to get:

  • Mutual fund recommendations from experts
  • Buy, hold or sell calls for stocks
  • Investment tips and tricks
  • All the latest news from Fundsindia.com

[jetpack_subscription_form]

1 thought on “What the Rajiv Gandhi Equity Savings Scheme holds for MF investors

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.