The finance ministry is expected to launch Rajiv Gandhi Equity Savings Scheme (RGESS) by 15th August. At present not much information is available on RGESS besides tax benefits and lock-in period among others.
To enhance savings and attract retail investment in capital markets, former finance minister, Pranab Mukherjee in 2012-13 Budget had announced RGESS. Under the Scheme, 50% tax deduction would be allowed to retail investors with annual income less than Rs. 10 lakh, for investment up to Rs. 50,000, with a lock-in period of three years.
Amit Sethi, owner, Amvi Financials said, “RGESS is meant for new investors, who have not invested in equity markets earlier. Every investment under this Scheme would be a fresh addition to the stock market. This scheme is meant for fresh entrants who generally don’t understand the risk involved in the stock market. Fluctuating financial markets make it essential for individual investors to invest in equity cautiously. Hence, mutual fund equity oriented schemes should be included with direct equity investment option to protect investors from loss.”
RGESS is likely to be a risky product for first time retail investors. Most people avoid investing in equity because of lack of financial knowledge and risks involved. People look at equity as a means of gambling where you’re more prone to losing money than gaining wealth, added Manikaran Singal, certified financial planner, Chandigarh-based Marvel Investments.
Mr Singal further said, “Usually, investors don’t have a proper channel as to where they can clear all their queries and be convinced that investing in equity is not a gamble but a means to add to their wealth. Investing in equity does require some basic knowledge. Retail investors need to know which stock to invest, what are various parameters to look into, when to invest, what should be the holding time period (five years or more) and how economic conditions affect equity investments.”
RGESS is a very simple investment product but it would be difficult for a fresh entrant to find a growth oriented and fundamentally strong stocks which can provide good return in invested period, pointed out Mr Sethi.
Nozer Damania, research analyst, Personal FN, added, “RGESS is a pure equity scheme exposing the retail investors to direct equity. Investing in equity surely beats inflation in the long run but it requires considerable expertise to invest in fundamentally good companies at their true valuations and at the right time. Thorough research on companies is imperative before investing in direct equity. Hence retail investors, that too, first time investors may not benefit from RGESS though it restricts investments in PSUs (public sector undertakings) and large cap stocks. The first time retail investors would be exposed to volatility in equity markets, which is currently reeling under domestic as well as global pressures.
Since, RGESS provides tax deduction of 50% on a maximum investment of Rs. 50,000 it may attract a lot of interest from investors in the middle class income group earning up to Rs 10 lakh. This will lead to a chunk of household savings being routed to the equity markets. The risk involved is certainly high. Hopefully, the finance ministry should find a concrete solution to minimise the risk of first time retail investors in the equity markets, Mr Damania highlighted.
According to Pankaaj Maalde, head-financial planning, ApnaPaisa.com, “Tax deduction in RGESS will be allowed only to first time investor in equity whose annual income is less than Rs. 10 lakh. If you invest up to Rs. 1 lakh in ELSS (equity linked savings scheme), you are eligible to get 100% tax deduction, but deduction in RGESS is reduced to 50% and maximum investment is also restricted to Rs. 50,000. Investing only looking at tax benefit will not benefit retail investors. Retail investors have taken life insurance plans only because it gives tax benefit, but we know very well that investment in insurance has not given good return to the investors.”
Maalde further said, “It is also important to know what will be the asset allocation in RGESS and who will manage the Scheme. Generally, it is not advisable to invest in new schemes because past performance is important while investing in equity. We advise any equity mutual fund to investors only after it has completed three years and have a good track record.”
The objective of RGESS is to channelise household savings into stock markets. A retail investor can avail the scheme only once in a life time. To make the scheme more attractive for retail investors, the finance ministry is also considering reduction in the lock-in period under the scheme to one year from the proposed three years.
Bhavin Shah, managing director, Mumbai-based Sapphire Wealth, said, “To some extent tax breaks provide in RGESS will induce retail investors to invest in equity. The number of investors participating in the equity market will definitely increase and the equity culture will spread to a number of people.”
RGESS is not similar to a mutual fund product in terms of investment style. Investors in mutual funds have an option to select from various styles of investment—like value, growth and blend styles, etc—while investments in RGESS will be at the discretion of the first time retail investors. RGESS cannot be termed as a complex product but yes, it do requires some clarity on the lock-in period of the investment, management of the investment, will investment in IPOs (initial public offerings) be allowed under the RGESS, etc. The product is simple but risky, Damania added.
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