Govt dashes MF hopes, no inclusion in RGESS

The finance ministry on Thursday ruled out the inclusion of mutual funds in the Rajiv Gandhi Equity Savings Scheme (RGESS) — a persistent demand from asset management companies backed even by the capital markets regulator.

RGESS was introduced in Budget 2012-13 to encourage retail investments in the stock market. The scheme has been designed to give first-time retail investors with annual income of Rs 10 lakh or less a tax benefit of 50 per cent up to a maximum investment of Rs 50,000. The scheme has a lock-in period of three years.

The ministry is, however, willing to look at three other issues: fungibility of expense ratio, which will help fund houses pay higher commissions to distributors; increasing the expense ratio by 0.25 per cent and incidence of service tax on investors. In the second meeting with AMC (asset management company) heads and the Association of Mutual Funds in India, a senior finance ministry official told the industry RGESS was conceived to promote direct investment in equities, sources familiar with the developments said.

TO BE CONSIDERED

• Fungibility of expense ratio
  Impact: Fund houses, especially large ones, will be able to pay higher commissions
   
• Hiking of expense ratio
  Impact: Will allow fund houses to spend more on marketing/ distribution
   
• Incidence of service tax on investors
  Impact: Investors will have to pay more when they buy units

OFF THE TABLE

• Rajiv Gandhi Equity Saving Scheme
  Impact: Industry won’t have access to tax-free funds
   
• Entry load
  Impact: No upfront commission to distributors

The Securities and Exchange Board of India (Sebi) had backed the industry’s demand, with Chairman U K Sinha saying on different fora small and first-time investors should enter the stock market only through mutual funds as they did not have adequate resources to make informed decisions.

Market experts said allowing mutual fund investors to come into the market through RGESS would have been a good move. “The lower tax incidence would have encouraged retail investors to invest through this product. That would have helped mutual funds when the markets turned around,” said the CEO of a fund house.

Fund houses were hoping if RGESS was extended to mutual funds, investors would put in money because of the tax benefit. This allowance is important for the industry because under the Direct Taxes Code, equity-linked savings schemes (ELSS) will go out of Section 80C. The inclusion of this scheme would have served as a replacement — though a poorer one. Under ELSS, investors were able to get benefit up to Rs 1 lakh. However, due to bad stock market conditions, ELSS has also suffered as collections have dipped sharply. These schemes, which had collected Rs 813 crore in 2011 (calendar year), have seen net outflows of Rs 132 crore in 2012. In the last five years, the highest amount these schemes collected was Rs 5,600 crore in 2008.

The industry is going through troubled times as it has lost 1.5 million equity folios in the first six months of 2012, according to Sebi data. Thursday’s meeting was the second between industry players and the finance ministry. Earlier this week, the prime minister’s chief economic advisor, C Rangarajan, also met mutual fund industry representatives.