In the fine print of draft Finance Bill 2017, the government has proposed to withdraw the tax benefits given to first time equity investors through Rajiv Gandhi Equity Savings Scheme (RGESS). However, investors can claim tax deduction under RGESS until April 2018.
However, industry experts feel that there will be no major impact of this withdrawal on the mutual fund industry. Industry experts attribute this to the administrative hassles and operational constraints in RGESS which have limited its popularity.
In fact, the disinterest of investors in RGESS is evident from the fact that there were very few takers for this scheme. According to a media report published in ‘The Financial Express’, there were only 55,600 accounts under RGESS, of which half accounts are dormant or zero investments. Further, the report says that the total value of initial investments has been only Rs.152 crore in five years. Most of these investments have been made in mutual funds (Rs.114 crore), followed by direct equity (Rs.36 crore) and ETFs (Rs.2 crore).
G Pradeepkumar, CEO, Union Mutual Fund feels that the proposal will have minimal impact on the mutual fund industry as the AUM of RGESS is small. In addition, its complicated structure deter investors to avail tax benefits. He believes ELSS has an edge over RGESS in terms of structure and performance.
Nilesh Shah, Managing Director, Kotak Mutual Fund seconds the view and said that there are better tax savings instruments available for investors to park the money for tax saving purposes under Section 80C like ELSS, which has gained popularity amongst the investors.
According to Suresh Soni, CEO, DHFL Pramerica Mutual Fund, opening a demat account is a hassle for first time investors. Moreover, to recognize first time investors is a major challenge for fund houses. Practically, only a few people meet the criteria to claim deductions under RGESS. On the other hand, ELSS has no such restrictions that makes it attractive for investors, he added.
Suresh Sadagopan of Ladder7 Financial Advisories is of the view that RGESS was never a major contributor to mutual funds. Since there are certain restrictions to avail tax benefits, this category has not picked up as expected. In addition, the deduction under RGESS is only 50% of total investment subject to the maximum of Rs.25,000. Many investors do not like such instruments; instead, they prefer 80C instrument, which give them deduction up to Rs.1.50 lakh a year, he said.
