The world of investments is so complex that many a times you are confused on selecting the right investment avenue matching your need and risk profile. Hence you approach experienced professionals to manage your investments or take some sort of help in planning your finances in order to fulfil your various goals. This is because either you don’t have enough time to manage your finances, or you simply lack the required skills to manage your money.
Considering this, if the Finance Ministry wants novice investors to invest directly in the equity markets in order to avail a tax benefit by investing in the Rajiv Gandhi Equity Savings Scheme (RGESS), then it may be difficult for the novice investors to pick the right stocks suiting their risk profile, at the right valuations. Though the tax benefit will help investors save their taxes, the direct investment in the equity markets may not be fruitful if utmost care is not taken in selecting the right stocks. And surely selecting the right stocks is definitely not as easy as buying grocery!
Thus taking into account the risks involved in direct equity exposure, the Association of Mutual Funds in India (AMFI) is trying to convince the Finance Ministry to secure an exclusive mandate to implement the Rajiv Gandhi Equity Savings Scheme (RGESS), a tax-efficient investment plan for retail investors that was introduced in the Union Budget 2012. This proposal, according to AMFI will allow the domestic mutual funds to handle the proposed equity scheme - RGESS, and help it replace its existing tax-saver product - Equity-Linked Savings Scheme (ELSS), which will lose its tax-saver status under the Direct Taxes Code (DTC) regime.
RGESS, which is aimed at increasing retail participation in stock markets, offers an income tax deduction of 50% for investments upto Rs 50,000 by new retail investors whose annual income is below Rs 10 lakh. The government, as per reports, is also considering a reduction in the lock-in period of RGESS from three years to one. Moreover, according to CRISIL, The demand for RGESS comes at a time when the mutual fund industry is passing through its roughest patches. The industry's month-end assets under management plunged by over 13% to Rs 5.87 lakh crore in March 2012, the lowest AUM since June 2009.
Impact on the investors…
The first time investors in the equity markets will find it very difficult to implement RGESS on their own. They might land up taking exposure to stocks which do not match with their risk taking abilities and thus may not be able to benefit in the long-term. On the other hand, if such novice investors are given support in the form of professional management through mutual funds it may work wonders; saving taxes along with fruitful returns in the long run.
We believe that direct exposure to equity markets entails a lot of risks with it. And for novice investors it may turn out to be a disaster investing directly into stocks. Adopting the indirect approach to equity markets, i.e., through mutual funds would not only help novice investors help save taxes but also help in earnings good returns on their investments through RGESS. In our view, if the RGESS replaces the ELSS of mutual funds it will benefit both the investors as well as the industry. Moreover, the mutual fund industry is one of the most well-regulated industries in financial markets.