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RGESS Falters at the Starting Line

The Rajiv Gandhi Equity Savings Scheme's first year collections are a disappointment. Perhaps a quick rejig is needed...

After the financial year has ended, the two share depositories released data about the scale of investments that came into the government's new Rajiv Gandhi Equity Savings Scheme (RGESS). The numbers don't paint a pretty picture. The scheme has ended the year with a grand total of Rs 51.67 crore of investments. A total of 21,800 demat accounts have investments in RGESS. This is 2.9 per cent of the total number of demat accounts that have been created during the period. This last number is important because in its conception and design, the RGESS is seen in the government as a way of getting people into equity investing. All RGESS investments are done through new (or yet unused) demat accounts.

To put things in perspective, equity mutual funds under the Equity-Linked Savings Scheme (ELSS), which are the main route for saving taxes by investing in equity, are likely to collect around Rs 2,500 crore during the year, which is roughly the same that they did during the previous (2011-12) year. That's some 50 times the money that came into RGESS. Of course, it can't be anybody's case that RGESS could have achieved a scale comparable to ELSS but even then, 51 odd crore for a scheme that delivers decent tax savings is an unpleasant surprise. This is unfortunate. As I wrote a few weeks ago, from an investor's viewpoint the scheme could be better but should certainly be used to invest in equity. The fact that investors have largely ignored this scheme is unfortunate.

Looking deeper into the data released by CDSL and NSDL, there is something else that is interesting. Some 90 per cent of the investments under the scheme have come through mutual funds and ETFs, and only Rs 5 through direct purchases of equity. I believe that the comparison with ELSS and the proportion of direct equity to equity mutual funds hold some lessons on why RGESS hasn't been a success.

For almost everyone who invests in ELSS funds, they are now a routine part of their annual investments menu. Those who start investing in these funds generally have a decent experience on returns and become regular investors. They often start SIPs which go on forever, goaded along by whoever is selling them the investments. This hasn't yet happened with RGESS because the scheme is too new. Worse, it is unlikely to ever happen because the scheme is time-limited. A new investor can only invest in the scheme for three years.

As for why mutual funds are the preferred route, that's simply because getting the RGESS sort of investor makes sense for a mutual fund distributor but not for a stock broker. Fund salesmen earn something when an investor stays invested but brokers earn only on transactions. As a rule, RGESS investors are not going to transact at all for the first year and then only under highly restricted circumstances. All in all, getting what is practically speaking total transactions of Rs 1.5 lakh spread over three years is not worth any effort for brokers.

Of course, brokers could use RGESS as a gateway investment to attract investors, which is actually the stated goal of the scheme. However, that's not going to happen unless the stock markets are rising, and that too at a fairly rapid clip.

Basically, even though it's in investors' interest to invest in RGESS, it's not good business for anyone to tell them that, which is also the problem that afflicts NPS. The stated goal of RGESS is to seed and nurture an equity investment culture in India, and early data suggests that it may not be a great success at achieving that. Perhaps a little more redesign is needed, and that's something that should not wait for the next year's budget.