It is imperative for you to invest your hard earned money in the right investment avenues suiting your risk profile, in order to reap the sweet fruit of your investment. Moreover, once you’ve invested your hard earned money prudently, the story isn’t not over, but in fact it has just begun. This is because soon after you’ve invested, you need to rightly nurture and review your investments, thereby ensuring that your money indeed grows or your wealth is multiplied over the long run. It is crucial to know how the funds are managed in a particular investment avenue.

When the Rajiv Gandhi Equity Savings Scheme (RGESS) was announced by the finance ministry, initially it was unclear as to which stocks one could buy to avail of tax benefit and whether mutual funds too will be covered under RGESS. So, ambiguity did prevail and thus investors and mutual fund industry were left speculating.

But now, recent guidelines issued by the Finance Ministry, for both direct investors in equity and for mutual fund are gradually providing a distinct view to investors. For first time investors who would like to directly buy stocks and avail of tax benefit, the RGESS has attempted to infuse safety and liquidity as the said scheme allows them to invest only in shares of Maharatna and Navaratna companies, besides the top-100 shares of the equity markets - commonly known as large caps. Likewise aiming to give a push to the paining mutual fund industry, the Finance Ministry is now trying to facilitate mutual funds to be included in REGSS but only via Exchange Traded Funds (ETFs), and thereby giving an option to investors to avail the tax benefit by investing in ETFs offered by mutual funds..

The Finance Ministry has made it clear that the exchange-traded funds (ETFs) of mutual funds are likely to be included in the list of avenues allowed for investments under the Rajiv Gandhi Equity Savings Scheme (RGESS). Let us delve deeper into this.

This means that ETFs of stocks will be allowed for investment under RGESS, listed and traded on the exchanges, would be part of the scheme, including such funds floated by mutual funds.

Some of the important features of RGESS you ought to know are:
 

• 50% tax rebate to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh.
   
• Investments allowed in follow-on offers of companies in this grouping (BSE 100, CNX 100 and blue chip public sector stocks) and initial public offers of PSUs that have Rs 4,000 crore of turnover
   
• Lock-in for three years, but investors may be allowed to churn their portfolio in after completion of one year
   

It is noteworthy that, earlier the Securities and Exchange Board of India (SEBI) had suggested allowing investments in mutual funds directly under the scheme. But keeping in mind the difficulties associated with such a proposal, the Finance Ministry will take a final decision in this regard. Moreover, if the Finance Ministry goes ahead with bringing investments in mutual funds under the RGESS’s fold, the structure of RGESS would have to be reworked accordingly.

We are of the view that, investors of RGESS will now have access to mutual fund’s management expertise which in turn will help investors in their task of managing their funds. In the absence of prudent fund management expertise it could have been a disaster for novice investors to single handily manage their equity investments under RGESS. However, the mutual funds involvement in the RGESS being restricted to ETFs, whereby stocks picking would be confined to top- 100 stocks of the Indian equity markets as well as Navratna and Maharatna public sector undertakings; the wealth generating potential for novice investors may be restricted. Full access to mutual fund investments under RGESS may help novice investors to benefit from the equity asset class in a better and larger way.

Nonetheless, even with the current specifications, this move will also boost the fortunes of the mutual fund industry which has seen a lot of erosion of funds under management. Having RGESS under its belt, the mutual fund industry stands a better chance to penetrate to tier II and tier III cities to achieve financial inclusion.

But it is imperative as an investor to have an ideal asset allocation before making your investments under any asset class. To know about your ideal asset allocation, watch out for PersonalFN’s Free WebSummit 2012 on ‘An Ideal Asset Allocation in Current Market Conditions’ by Mr Ajit Dayal.
 

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