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MFs eye Rajiv Gandhi Equity Savings Scheme

If structured well, equity-linked saving schemes could fall in the proposed scheme

Chandan Kishore Kant & Palak Shah  |  Mumbai 

Indian fund managers want the proposed Rajiv Gandhi Equity Savings Scheme (RGESS) to be routed through (MFs). Though there is no clarity yet on how the scheme would operate to attract retail investors into the equity markets, industry executives and experts say there is no other vehicle best suited for the proposed initiative except MFs, provided the product is structured well.

But, would mutual fund investments qualify for the scheme, ask market experts. “Often, new investors would prefer to come through the MF route as they may have little knowledge about investing directly in equity markets,” says Rajiv Bajaj, managing director of Bajaj Capital.

In his Budget speech the finance minister made his intentions clear that he wanted to encourage the flow of savings into financial instruments and improve depth of the domestic equity He proposed to introduce RGESS, which would allow new retail investors investing up to Rs 50,000 directly in equities, an income tax deduction of 50 per cent. The scheme would have a lock-in period of three years. Investors with annual income of below Rs 10 lakh would be eligible to reap the benefits of the scheme.

But there are problem areas too, in the proposal. “Who is a new retail investor, and why investments have to be directly in equities?” asks Dhruva Chatterji, senior research analyst at Morningstar India.

Dhirendra Kumar, chief executive officer (CEO) of Value Research, says, “The proposal of RGESS has huge potential to attract funds from retail investors. But it could prove disastrous if new investors put in money directly into equities because of their inexperience. I hope that details emerge, are made part of it.”

According to experts, the country’s stock could get up to Rs 50,000 crore of retail inflows per annum of long-term funds, which would exceed the funds brought in by foreign investors. The money would not only boost India’s capital markets, but also bring stability as these funds will be stickier.

Sanjay Sachdev, CEO of Tata Mutual Fund, agrees, “If MFs are made vehicles for RGESS, it will be easier and faster as the industry has an established system. This could be a variant of the existing equity-linked saving schemes (ELSS).” There are many takers for this suggestion. In post-Budget conversations with Business Standard, industry chief executives said government has chosen a good time for this product.

If further guidelines favour the MF industry as a vehicle, fund houses would roll out appropriate products, (such as Tata Mutual Fund RGESS or ICICI MF RGESS), they added. With the Direct Taxes Code (DTC) set to come into play soon, ELSS will lose its edge as tax saving havens. “Operationally, it is possible to have the existing ELSS under RGESS,” says Nimesh Shah, CEO of ICICI Prudential Mutual Fund. Moreover, if MFs are made vehicles for the new scheme, investors would have a variety of options to chose from out of the existing ELSS, depending on the schemes’ track record.

Equity have the largest investor base in terms of folios. As per statistics from the Securities and Exchange Board of India (Sebi), in January overall equity folios stood at 38.4 million.

Of this, ELSS constitured over eight million.

According to industry officials, since there is a substantial investor-base in ELSS, the proposed scheme should be moulded in a way that existing retail investors in tax-saving equity products can continue under a new name of RGESS.

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First Published: Tue, March 20 2012. 00:10 IST
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