MF investment may be part of Rajiv Gandhi Equity Scheme

Prime Minister's attention on mutual fund issues brightens prospect

The government might finally include mutual fund (MF) investments in the Rajiv Gandhi Equity Savings Scheme (RGESS), against the backdrop of Prime Minister Manmohan Singh outlining resolution of problems in the MF industry as one of the priority areas.

An official, who is part of the consultation process for concretising RGESS norms announced in the Budget, told Business Standard, that with the PM showing interest chances of MF investments becoming part of the scheme had increased, as initially the finance ministry was not inclined to accept this idea.

The scheme announced in the Budget by former Finance Minister Pranab Mukherjee is aimed at encouraging retail investments in the capital market.

RETHINK ON FRAMEWORK

• FinMin had earlier rejected the proposal
• Scheme to allow income tax deduction of 50% to new retail investors
• Sebi favours inclusion of MFs to reduce risk for small investors
• RGESS norms to come in July
• FinMin considering reduction in the lock-in period

The Securities and Exchange Board of India (Sebi) has been pitching to route the tax-saving equity scheme through mutual funds to minimise the risks associated with direct equity investments by investors.

At present, equity-linked savings scheme (ELSS) or tax-saving MF schemes are on their way out, if the proposed Direct Taxes Code (DTC) is implemented from April 2013. Inclusion of MFs in RGESS will help keep these under the ambit of tax savings schemes.

Finance ministry officials have indicated the norms for RGESS would be announced sometime in July.

The scheme would allow income tax deduction of 50 per cent to new retail investors, who invest up to Rs 50,000 directly in equities, and whose annual income is below Rs 10 lakh.

To make the scheme more attractive for retail investors, the ministry is considering reduction in the lock-in period under the scheme to one year from the proposed three years.

“There are issues about the MF industry which need to be resolved,” Singh had said in his first meeting with the secretaries after taking additional charge of the finance ministry.

Finance ministry officials met representatives of industry and Sebi, subsequently, to look at steps to improve the situation.

An official in the know of the developments said though Sebi was not in favour of any change in the current policy on entry load, the market regulator was looking at changes in the norms associated with management fees to help the industry.

Currently, the expense ratio for equity funds is capped at 2.25 per cent. Of this, a maximum of 1.25 per cent can be charged by the fund house as investment management fees.

The expense ratio of a mutual fund is the amount, expressed as a percentage of total investments, paid for the fund’s operating expenses, investment management fees, administrative fees and other asset-based charges incurred by the fund house.