February 18, 2015

FSM in Media: Reverse tax on debt funds; revamp RGESS: MF industry urges Jaitley
There are a lot of anomalies with Rajiv Gandhi Equity Savings Scheme (RGESS), which needs to be corrected.

by Dr. Renu Pothen


This column was published in Dalal Times on February 13, 2015.


I start this column with a table which is clearly a reflection of the state of affairs of the Indian mutual fund industry.

 Financial Saving of the Household Sector
  Per cent to Gross Financial Saving 
  2010-11 2011-12 2012-13 2013-14
Deposits           49.90          59.10          56.60          58.80
Mutual Funds (including UTI)           -1.10          -1.20            3.40            1.80
Life Insurance Funds           20.00          21.30          17.30          17.00

Some of the funds in the industry today have completed more than 18 years and have delivered handsome returns to investors. The best example is Reliance Growth Fund whose inception date is October 8, 1995. If an investor had parked Rs 10,000 in this fund at the time of inception, his corpus would have grown to INR 8, 03,596 by February 11, 2015. We are talking about a CAGR of 25.43 percent since inception. 

The mutual fund industry today has numbers to show that patient investors will definitely be rewarded if they hold onto their investments for a long time. The question that arises then is “Why are the households in India not confident of mutual funds as an instrument for long term savings?” At this juncture instead of getting into a blame game, I would like to pen down a few expectations from Budget 2015. I think it is high time that the government gives due emphasis to this industry and brings in more conducive policies so that retail investors can also actively participate in Team Modi’s “Acche Din Aane Wale Hain” theory.

Reverse the taxation on debt funds

In Jaitley’s maiden Budget presented in July 2014, he had removed the tax arbitrage available for debt funds by increasing the long term capital gains tax from 10 percent to 20 percent and the period of holding was also increased to 36 months from 12 months. The reason given for this was that this tax arbitrage has not benefitted retail investors. I completely agree with this justification but the question is “Were retail investors really aware about this tax arbitrage available to them in Debt Funds?” I can vouch for the investors and say that the answer is a definite NO. It is only very recently that retail investors started considering debt funds as an instrument to fulfill their short term needs like yearly tuition fees of children, down payment for their properties, etc. all of which normally has a time horizon of 1 year to 2 years. Honorable Finance Minister, the first table in this column is proof enough that the banking sector is widely favored by retail investors. Hence, the government’s focus should be on mutual funds and I believe that a tax arbitrage can help the industry if the investors are made aware about these opportunities. The onus of educating investors should not be only on fund houses; even financial advisors who are the guardians of investors’ wealth should take the initiative to educate their investors.

More categories of equity funds should get a place in Section 80C

As the financial year comes to an end, I get to see a lot of first time investors rushing to park their surplus into Equity Linked Savings Scheme (ELSS) to save tax. While doing this, investors tend to forget their risk profile and park their money in any of the top performing tax saving funds. What investors are missing out here is that even if it is an ELSS, they have to check their risk profile before making an investment decision. After the Modi Wave hit markets, we have seen a lot of ELSS increasing their exposure into mid and small cap stocks. In this scenario, if a conservative investor has taken an exposure into mid-cap oriented ELSS, he will be in for a rude shock, if the market gets into a correction mode. Hence, my suggestion is that more categories of funds like large cap funds, multi cap funds and balanced funds should find a place in Section 80C. This would give investors a wider choice of funds and would help them in selecting tax saving funds on the basis of their risk profile. 

Revamp Rajiv Gandhi Equity Savings Scheme (RGESS )

RGESS was launched with a lot of fanfare in Budget 2012-13, with the objective of encouraging savings of first time retail investors into domestic capital markets. However, there are a lot of anomalies with this scheme, which needs to be corrected if the stated objective has to be achieved. The scheme was meant for first time investors whose income is less than or equal to INR 12 Lakh and who do not have a demat account or an inactive demat account with no transactions till the date of notification of the scheme. The biggest flaw of this scheme was that investors who do not have a demat account but have been investing in mutual funds via the online or offline platforms were also considered as first time investors. To add to this, even individuals, who are not the first holders of a joint account, are eligible to participate in this scheme. This, I think is not the right way to classify first time retail investors. Secondly, this scheme has a fixed lock-in period of 1 year and flexible lock-in period of 2 years. If the intention of the government is to bring first time investors into markets then it would be better to go in for a fixed lock-in period of 3 years to 5 years. This is because we are talking about making investors comfortable with equity markets and helping them to create wealth. This can be achieved only if investors stay invested for long periods.

If the Pradhan Mantri Jan-Dhan Yojana is turning out to be the biggest financial inclusion initiative in the world, then the Finance Minister can surely think of amending the RGESS and tap first time retail investors into the mutual fund industry. Although RGESS includes direct equities, Mutual funds and ETFs, I would suggest that it is better for first time investors to take the mutual fund route as an exposure into direct equities will only shake their confidence in the markets. Honorable Finance Minister, if you can change the data points for mutual funds given in the first table, then the biggest beneficiaries would be our retail investors. Today a majority of portfolios are filled with fixed deposits, PPFs and other traditional savings instruments and I believe that an addition of mutual funds will be the alpha generator for these investor portfolios.


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