The government has announced Rajiv Gandhi Equity Savings Scheme (RGESS) with an objective of encouraging flow of savings of small investors in domestic capital market.
Eligible investors will get an additional tax benefit of up to Rs 5,150 under section 80CCG by investing up to Rs 50,000 in RGESS-eligible securities and mutual fund schemes. This benefit is over and above the benefits available under section 80C.
Deduction under section 80CCG is available on 50 per cent of the amount invested. The benefit is in addition to deduction available under section section 80C. For example, if one invests Rs 50,000 under RGESS, the amount eligible for tax deduction from his income will be Rs 25,000. If one invest Rs 40,000 under RGESS, the amount eligible for tax deduction will be Rs 20,000. So he may save about Rs 2,500, Rs 5,000 and Rs 7,500 for 10 per cent, 20 per cent and 30 per cent income tax slabs, respectively, under this scheme.
Mutual fund houses have lined up exclusive schemes that would invest in RGESS-eligible securities.
But do RGESS schemes, which do not have any track record of performance, make sense for first-time equity investors, regardless of the small tax benefit? Or whether investors should forego the tax benefit and stick to investing in equity funds with proven track record?
New equity investors earlier used to subscribe to equity-linked saving schemes (ELSS) of mutual funds for an equity exposure and tax benefits it provides under section 80C.
Due to retail investors’ interest in equity investment hitting a low, the government has given tax exemption through RGESS to make equity investing look attractive to common man.
The return given by RGESS after three years will depend on same factors as an equity fund, but the fund performance may vary due to RGESS fund manager’s performance. Smaller fund size may also put constraints on the fund’s performance in the initial three years.
In RGESS, eligible investors are those first-time equity investors whose taxable annual income is less than Rs 10 lakh.
Equity funds with 10-year track record against RGESS with no proven track record have given return of close to 25-30 per cent.
Schemes like HDFC Top 200 by HDFC Mutual Fund has given a 10-year return of 29.18 per cent and Reliance Growth Fund a return of 31.79 per cent.
The RGESS funds announced so far are either index-based funds or equity funds. Index-based fund options include SBI Sensex ETF – an exchange-traded fund (ETF) tracking BSE Sensex by SBI Mutual Fund and UTI RGESS Fund – a three-year close-ended index fund tracking NSE’s Nifty by UTI Mutual Fund.
Quantum Index Fund from Quantum Mutual Fund also qualifies under RGESS, Quantum Mutual Fund said in a statement. It is an open-ended ETF tracking S&P CNX Nifty (Nifty), which is diversified across 50 stocks.
Jimmy Patel, CEO, Quantum Mutual Fund, said, “For a new investor, investing in an index fund may be a good option. These funds invest in stocks of companies in such a way that it has an index as an underlying security. It follows passive investment strategy, a financial strategy in which a fund manager invests in accordance with a pre-determined strategy that doesn’t involve any forecasting. The idea is to minimise investing fees and to avoid the adverse consequences of failing to correctly anticipate the future.”
RGESS equity fund options include DSP BlackRock Mutual Fund’s DSP BR RGESS Series 1 – a three-year close-ended equity fund – and IDBI Mutual Fund’s IDBI RGESS Series 1 Plan A – a three-year close-ended equity fund.
Investors should take a call on RGESS after seeing the performance of the fund in first two years and meanwhile invest in an equity fund with an established track record.
Even ELSS schemes would be good for investment as they would still enjoy the tax benefit and also give good returns. Sundaram Tax Saver Fund from Sundaram Mutual Fund has given a return of 18.8 per cent since inception in November 1999.
Still if somebody wants to invest in new RGESS scheme, the index-based funds would be much better against the actively managed equity funds because index returns are in line with market returns, whereas, equity fund returns could be much better or much worse.