1. Should An Investor Consider RGESS?
A PhD in Economics, Dr Pothen flagged off her career as an academic associate with the Indian
Institute of Management, Ahmedabad followed by a stint at Pioneer Investcorp Ltd. In her current
position, she heads Research at Fundsupermart.com.
We have reached the end of the financial year, also considered as the tax-saving season for our
investors. It is during this time that we get maximum queries on the popular tax saving instrument in
the mutual fund space which is the Equity Linked Savings Scheme (ELSS). However, this year seems to
be different with all factions of the industry having diverted their time and energy to a scheme called
Rajiv Gandhi Equity Savings Scheme (RGESS). This brainchild of the UPA Government, launched in the
Budget of 2012-13 to propagate financial savings among retail investors, is the topic of discussion in
every nook and corner of the industry. Investors have already been bombarded with a number of
articles in the media. Financial experts are talking on the different aspects of this scheme and fund
houses are also doing their bit to create awareness on the same before the closing of the New Fund
Offers (NFOs).
The aim of this column is to just pen down a few thoughts on RGESS while leaving it to the investors to
read the finer prints of this scheme and accordingly take the right decision to invest in the same or not.
When Pranab Mukherjee announced the launch of RGESS in the last budget, I had written my views on
this scheme in moneycontrol.com which read: ''Another measure that was announced today was the
launching of Rajiv Gandhi Equity Saving Scheme, which allows a tax deduction of 50% to investors who
invest upto INR 50,000 directly in equities, having a lock-in period of 3 years. However, the catch in this
scheme is that it is aimed at investors whose annual income is below INR 10 lakh. We are of the view
that Mr. Mukherjee shouldn't have kept a maximum limit on annual income as an investor who is
earning less than INR 10 Lakhs will not want to play in equity markets, in a scenario wherein high
interest rates and inflation are hurting him on a daily basis''.
The government's decision to launch this scheme was to encourage the flow of savings into financial
instruments and improve the depth of capital markets. The intention of the government seems to be in
the right direction as we are talking about a country where even today more than 50% of the financial
savings of the household sector flow into bank deposits while another 20% goes into life insurance
funds. The rest of the surplus is allocated into currency, provident and pension funds, investments in
government securities, small savings and shares and debentures. The frightening figures are there for
all to see in RBI's Annual Report.

2. The Ministry of Finance came out with the notification on November 23, 2012 regarding this scheme and
by then the term ''equities'' was extended to include Exchange Traded Funds (ETFs) and Mutual Fund
Schemes. This was a good initiative from the government as a first-time retail investor would definitely
find it difficult to fish in the wide ocean called markets and scout for the right stocks. However, I am not
in sync with the policymakers regarding the definition of first-time investor towards whom the scheme is
targeted. My main contention here is that this scheme is actually aimed at investors who do not have a
demat account or an existing demat account holder with no transactions till the date of notification. In
addition, a new retail investor could even be a second/third demat account holder. The flaw here is that
if the investor does not have a demat account but has been transacting in mutual funds through offline
or online platforms, then he/she cannot be considered as a new entrant into equity markets. If the aim
of the government is to divert untapped surplus savings into the capital market, then RGESS in its
current form will not serve the purpose for which the scheme was launched.
Another observation that needs a mention here is the liberty given to first-time investors to invest in the
top 100 stocks at NSE and BSE, any of the public sector enterprises which are classified as Maharatna,
Navaratna and Miniratna, FPOs, NFOs, and even unlisted equity shares. A new investor will definitely not
have the capability to invest in any of them and will require proper hand holding. Hence the best route
for these investors would be through mutual funds. The mutual fund schemes which are compliant with
RGESS can in turn only invest in those stocks either from BSE 100 or CNX 100 or any of the other
securities mentioned above. My fear is that in their enthusiasm to launch RGESS, the fund houses
should not replicate the already existing large-cap or multi-cap funds in their own stable.
Finally, unlike ELSS, this scheme does not have a fixed lock-in-period for 3 years. Instead, the scheme
will have a fixed lock-in period for a year and 2 years of flexible lock-in period. During this period, the
investor can trade the eligible securities and can claim tax benefit, provided the demat account is
compliant for a cumulative period of minimum 270 days during each of the 2 years of the flexible lock-in
period. The government is actually forgetting the fact that this scheme is for new investors who should
first feel confident about the equity markets rather than encourage them to become active traders from
the second year onwards. The aim should be to make investors understand the advantages of long-term
investments so that they don't follow the herd whenever the markets are in a dizzy phase. Hence,
instead of a complicated lock-in period, the government should have gone in for a fixed lock-in period of
3 years.
My take on RGESS is that this scheme requires a lot of modifications so that it can serve the purpose for
which it was launched. Like all market participants I hope that Team Chidambaram will be able to do the
balancing act to make this scheme more effective. In the current context I would advise this scheme to
all those investors who want to take advantage of the little tax benefit that it promises. Investors should
also look at the mutual fund route rather than going in for direct equities as this will relieve them from a
lot of tension which they will have to take, so as to be compliant with this scheme.
DISCLAIMER
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materially interested in any such. Any advice herein is made on a general basis and does not take into account the specific
investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily
indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall
as well as rise. Opinions expressed herein are subject to change without notice.