After four months of deliberations between the mutual fund industry, the Finance Ministry and the capital market regulator - Securities and Exchange Board of India (SEBI), on whether to include mutual funds (MFs) in Rajiv Gandhi Equity Savings Scheme (RGESS); it has now been finally decide by the Finance Ministry that the mutual funds will remain out of the ambit of RGESS, dashing all hopes of the MF industry to find a replacement for their equity linked savings scheme (ELSS).

It is noteworthy that earlier, Mr U.K. Sinha, Chairman of SEBI too had backed the mutual fund industry’s demand, where on different forums, recommending that small and first-time investors should enter the stock market only through mutual funds, since they did not have adequate resources to make informed decisions. The mutual fund industry body - Association of Mutual Funds in India (AMFI) too was lobbying hard to get its hands on the RGESS, but all in vain.

RGESS was introduced in Budget 2012-13 to encourage retail investments in the stock market. The scheme allows an income tax deduction of 50% to new retail investors who invest up to Rs 50,000 ‘directly in equities’ and whose annual income is below Rs 10 lakh.. Also, at present it has a lock-in period of 3 years.

But since the Prime Minister, Dr Manmohan Singh outlined resolution of problems in the mutual fund industry as one of the priority areas; the Finance 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% (which enables mutual fund houses to spend more on marketing and distribution - filling pockets of mutual fund distributors) and
• Incidence of service tax (which would be borne by investors)
   

We are of the view that, encouraging new investors, to directly invest in equity is an imprudent decision for structuring RGESS, as it heightens the risk which new retail investors would be exposed to as effective diversification may not be possible by capping the maximum amount to Rs 50,000. Also with the chance of new investors not having the required wherewithal to invest directly into stocks, it may have detrimental impact on one’s hard earned savings. Although the 3 year lock-in period has been enforced for the investor to stay invested for the long-term, we think that the same could have facilitated in a better way through mutual funds as well.

The Finance Ministry, we think should look at ultimate impact on the retail investors before taking such unwarranted decisions. The Finance Ministry should also take care of the management aspect of RGESS. There should be proper checks and balances in place in order to safeguard the hard earned money of the investors.


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Comments
jeevanshetty@yahoo.co.uk Jul 16, 2012 Govt has taken right decision by not linking the new RGESS to mutual fund. The investor who wish to invest in equities is well informed these days unlike the earlier days of pre-internet age. Also the first time investor would be young and has the potential to take the risk of investing in equities. Even if he makes a mistake or two he will learn from his experience. He will have the satisfaction of loosing or winning. If he is forced to go to mutual fund route, he will blame the govt. or the fund house if they failed to perform even due to extraneous reasons. The new scheme is very intended and hope it would be successful in garnering funds into equity market and imbibe the culture of investing in equities in you young population entering the job market.
bksinghus@yahoo.com Jul 16, 2012 The introduction of new scheme without including mutual funds in the new tax saving instrument in place of ELSS is not a right solution. Whenever a new mode of tax saving instrument is added and an existing one is withdrawn, there should be a white paper giving the reasons for withdrawal and inclusion. These changes should not be on the whims and fancies of certain bureaucrats.
pvthosar1@yahoo.co.in Jul 17, 2012 govt. decision is against in the interest of " small investers  & new investers ", most dicouraging !!!!!!!!!!!!!!!!!! must rethink !!!!!!!!!!!!!
anilagrawal1@yahoo.com Jul 18, 2012 Talking about real estate regulator, let me assure you nothing like this will ever happen. Too many top guns will be adversely affected, if it happens the way you are describing. So pl do not raise people's expectations.

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