Surveys after surveys
have revealed the truth that people have lost their hard earned money in
insurance products when they choose to invest in insurance products. This is
also a known fact that insurance products are mainly bought in India to save
tax. Now we have a new investment scheme with tax benefits targeted towards
first time investors in equity. Buying any financial product only for tax
benefit cannot be considered a good idea unless you invest in the product after
evaluating the merits and demerits of the scheme before investing. The finance
minister has recently issued details of much awaited Rajiv Gandhi Equity
Savings Scheme after six months since it was announced in the last budget. The
time will tell us whether “History repeats itself again or not”. Let us understand the nitty gritty of the
scheme on the basis of the communication from the Finance Ministry.
First of one should
know about certain preconditions before they become eligible to invest in the
scheme for taking tax benefit. The scheme is targeted towards first time equity
investors to be identified on the basis of PAN numbers and whose annual income
is up to Rs. 10 lakhs p.a. in the current financial year. The maximum
investment eligible for the tax benefits is Rs. 50,000 on which the investor
will get a deduction of 50% of the amount invested. People earning 10 lakhs
fall maximum in 20% tax slab so will be able to save maximum tax of Rs. 5,150.
Before investing one must know that to claim the tax benefits investors have to
invest in equity either directly in stocks of BSE 100 or CNX 100 index or those
of public sector undertakings which are Maharatna’s Navratna’s and Miniratna’s.
In addition mutual fund schemes or ETFs who invests in such eligible securities
are also brought under this scheme.
It is not clear whether
person who invests through mutual fund route in equity but do not have demat
account will be considered as first time equity investor or not. There may be
many cases where people have invested in direct equity long back but now they do
not invest directly but still have demat account lying ideal. Also people have
opened the demat account for subscribing in infrastructure bonds issued for tax
exemption. This all to be clarified before scheme is launched officially.
We always advise our
clients not invest directly in equity as it requires in depth knowledge and
continuous research and analysis which an individual is not capable of doing
unless it is his full time job. Before investing in equity people must also
know equity as an asset class. Equity investment comes under high risk and high
return category. Investors must invest in equity accordingly to their asset
allocation ratio. It is also advisable to review investment portfolio
periodically and rebalance the portfolio if need be. Never try to time the
market and always stay invested for a long term are the success mantras for
investing in equity. But once you open demat and trading account with a broker
for this scheme, you will be tempted to buy other stocks on the basis of tips
from friends and relatives. This may lead to heavy losses in future. Government
must try to create disciplined and systematic long term way of investing in
equity.
The scheme has a lock
in period of three years commencing from the last day of purchasing under
RGESS. Surprisingly investors are allowed to sale and repurchase the stocks
after one year and scheme has a complex formula of 270 days which will be
difficult for a lay investor to understand.
It seems that government wants to promote trading culture amongst the
new investors and not long term investment culture. I am not in favour of
churning portfolio frequently and this is not going to work.
Investing through
mutual fund or ETFs is a good option but we have to wait for the details and
announcements of exact schemes which will be eligible for this scheme. There
are many schemes which are not performing as compared to their benchmark. You should be extra careful while investing
in those schemes just to save nominal amount of tax of around 10% of the amount
invested. It is also not clear whether this scheme will continue next year or
not. Investors should take informed decision before investing in any financial
instrument so that it should not result in any financial loss in future.
