Why Rajiv Gandhi Equity Scheme is designed to fail

The response to RGESS has been poor so far with few takers, and the future doesn't seem bright either

It was perhaps only the finance ministry that thought that it could channelise a good amount of money into the equity market through a market-linked tax saving instrument called Rajiv Gandhi Equity Saving Scheme (RGESS). Announced in the 2012 Budget, the then finance minister Pranab Mukherjee had put in two main conditions for investing under the scheme.

A first-time investor in the market can invest up to Rs 50,000 a year and the income should not exceed Rs 10 lakh a year. In the 2013 Budget, Finance Minister P Chidambaram for some reason increased it to Rs 12 lakh.

The response in both the cases has been poor. According to news reports, mutual fund houses have found few takers for their RGESS offerings.

There are a number of reasons the scheme would have been a failure, we take a look at some of them:

Unlike a normal mutual fund investment, RGESS required an investor to have a demat account. The cumbersome process, the fees involved and no other utility of a demat account for an investor buying an RGESS fund was a big disincentive.

• The amount involved – Rs 50,000 and the subsequent tax benefit was not compelling enough.
• With no track record, these schemes were benchmarked against the poor performing ELSS schemes in the market. Out of the 12 schemes the best return was of a compounded annual return of 10.77%. The fund with the biggest corpus has given a return of only 4% over the last three years. Three funds had given negative returns.
• Asset management companies are having a tough time raising funds for their schemes, more so in the tax saving schemes which have a three year lock-in. The total asset under management of the top 12 scheme is only Rs 2,439 crore out of which UTI’s MEPUS has a corpus of Rs 1,252 crore. In other words 11 funds have an average asset of only Rs 110 crore.  
• There is little logic in increasing the income limit from Rs 10 lakh to Rs 12 lakh without a corresponding increase in tax exemption. Further, the maximum tax exemption of only Rs 5,000 cannot be termed as an incentive to invest.

Even with the existing crop of investors, few are keen on putting their money in tax planning schemes. Little then should be expected from RGESS. A falling savings rate, weak economy and a market that’s not really going anywhere do not make it the best time to raise money, especially from those who do not know how to do it. The savings by way of tax would be set off by erosion of capital in the current scenario.