Should you bother with RGESS?
A widely discussed scheme that offers benefits so meagre, figuring out where you should invest would alone be too much trouble. But there are bigger problems than that.
Like most tax-saving schemes, the announcement of the Rajiv Gandhi Equity Savings Scheme (RGESS) was met with optimism. However, only a handful of schemes that qualify for tax saving are actually worth investing in. And RGESS may not be among them. The scheme, which was launched in the last fiscal, might seem like a good bet at first glance, but a short examination will reveal the flaws in the scheme.
It’s ironic that a scheme tailored for people new to equity investments should be so complicated. The scheme comes with many riders. For example, the investment has a 3-year lock-in period, but this lock-in is flexible. You could sell RGESS-enabled mutual fund units in the second and third years, but would need to maintain your unit balance till the end of the third year. In other words, the amount you invest in the first year is the balance that you need to maintain at the end of both the subsequent two years, unless the value of your portfolio falls because of market volatility.
Furthermore, you can only invest in certain schemes and stocks. There are only a handful of eligible mutual fund schemes, such as HDFC RGESS Fund. These funds will only invest in companies on the BSE 100 Index, PSU Maharatnas, PSU Navratnas and PSU Miniratnas. This is expected to lend stability to the fund. However, you may also invest directly. Both these
What makes the scheme even more unappealing is that the benefits are not worth the effort. The scheme has an investment limit of up to Rs50,000 and is open only to people with an annual income of Rs12 lakh or less. Assume that you invest the maximum, Rs50,000, you will end up saving only Rs2,500 in the first year if you fall in the 10% bracket, Rs5,000 if you fall in the 20% bracket and Rs7,500 if you earn between Rs10 lakh and Rs12 lakh annually. Even this meagre benefit is only one-time. Since the RGESS is only meant for first time investors, you can never invest in it again after your investment is locked in.
Encourages lump sum investment
Although the scheme allows you to invest in tranches, it’s unlikely that you would be able to use it, given that you will have to submit tax receipts to your employer. There’s also a clause with making investment in tranches that you may want to avoid: the lock-in period will end only a year after you make your last instalment. So assume you invest Rs20,000 on January 2, Rs15,000 on February 2 and another Rs15,000 on March 2, 2014, your lock-in period will end only on March 1, 2015. This would mean your first two instalments were effectively locked in for 13 and 14 months, respectively.
So the scheme actually encourages a lump sum investment, which is not a great idea in the present volatile market atmosphere, and it is definitely not advisable for a first-time investor. Lump sum investments will expose the entire invested sum to risk, something no new investor wants. Investing in one go also requires you to time the market well, something only people with knowledge and experience can do.