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MFs and ETFs add colour to RGES

MFs and ETFs add colour to RGES

Six months after it was first announced, the Rajiv Gandhi Equity Scheme will finally see some action. The finance ministry has announced that the scheme to promote and boost equity investments amongst retail investors will be open to investments through mutual funds and exchange traded funds besides direct equity investments.

The move to allow investors to invest through mutual funds and ETFs is more beneficial to investors compared to investing in direct equity. Mutual funds have a proven track record and there is greater diversification when investing in them compared to direct equity investing. It is desirable for first time investors to invest in an instrument that is less risky compared to direct equity investments including IPOs.

The scheme is open to first time equity investors with less than Rs 10 lakh annual income. Investors can invest up to Rs 50,000 in a financial year to claim 50 per cent tax deduction. First time investors also includes investors who have opened the demat account but have not made any transaction in equity or derivatives till the notification of the scheme. However, a retail investor can invest in this scheme only once in a lifetime.

The proposed three-year lock-in comes with the flexibility of trading the instruments after holding it for a year, which is good for investors as it does not force them for longer lock-in. However, how the tax authorities will monitor this trade needs to be seen. For investors who qualify to invest in RGES, the move is beneficial as this investment does not compete with any other investments, unlike the Section 80C benefit that has several investment options competing for Rs 1 lakh limit in a financial year. The necessary amendments have already been made in the Income-Tax (I-T ) Act with the introduction of Section 80CCG which has been introduced and applicable for the first time in financial year 2012-13. According to a finance ministry release, the scheme will be notified in the next two weeks.