Funds seek open-ended status for RGESS

MFs ask finance ministry to relax investment eligibility in the product

The Rajiv Gandhi Equity Savings Scheme (RGESS), the new tax-saving mutual fund product, could become open-ended and eligibility to invest in these could be relaxed if the finance ministry accepts the sector’s suggestions. Finance Minister P Chidambaram said on Saturday the Union budget could make some announcements to simplify RGESS to attract more retail investors.

The close-ended structure of RGESS is one of the main hindrances to the product’s popularity, said four mutual fund sector officials. In a close-ended scheme, investors’ units in the product are locked in for a pre-determined period — three years in this case. The sector is seeking a change in structure to open-ended, where unitholders can withdraw at will.

“It’s very difficult to attract investors if it’s close- ended, as they want liquidity, especially when a product is considered risky for a first-timer,” said a senior official with a bank-sponsored mutual fund, familiar with representations to the finance ministry.

RGESS, a product tailored exclusively for first-time retail investors in the stock market, allows those, who invest up to Rs 50,000 in ‘eligible securities’ and have gross total annual income of up to Rs 10 lakh to gain tax benefits. Mutual funds were allowed to launch the product after representations but some of the rules dimmed its prospects.

The sector believes the rule to allow tax benefits for only the first year also needs to be relaxed. Mutual funds are pushing for a ‘permanent benefit’, where investors with gross annual income below Rs 10 lakh can avail of this benefit till his salary stays below the threshold.

“If allowed only for first-timers, investors will invest the money for tax benefits and forget about it. They will not be able to see the benefits of systematic investments in the market,” said the chief executive officer of one of the largest mutual funds in the country.

The rule requiring investors to buy RGESS through a demat account is also dampening interest in the scheme. Mutual fund schemes are mostly sold through distributors.

“Asking a first-time investor to open a demat account is asking for too much. The person is already coming in with apprehensions,” said the managing director of another bank-sponsored mutual fund. “The cost to open a demat and maintaining one annually also beats the purpose,” he said.

Echoing the bank-sponsored fund’s managing director, Dhirendra Kumar, chief executive officer of Value Research, a Delhi-based mutual fund tracker, said investing in mutual funds through demat will make it cumbersome for first-time investors.