Mutual Funds

Should you invest in an RGESS fund?

Bhavana Acharya | Updated on November 22, 2014



Better not. Equity-linked savings schemes too help you save on tax and have a longer track record to show a fund’s mettle

Haven’t made any equity investments before? If you earn less than ₹12 lakh, the Rajiv Gandhi Equity Savings Scheme (RGESS) gives an additional route to reduce your taxes, under which you can invest in specific stocks or mutual funds. But then, you’re only just dipping your toes in the equity market.

So between shares and mutual funds, the latter route is preferable since timing and stock selection, and the expertise it involves, might be quite challenging for you. And fund houses have risen to the occasion, and schemes compliant with the RGESS criteria are coming thick and fast.

Should you go for it?

Here are the advantages. Deduction under the RGESS benefit, or under Section 80CCG, is in addition to the deductions available under the ubiquitous Section 80C. So you can invest in that provident fund, life insurance scheme, national savings certificates and others up to the ₹1 lakh limit. Besides this, if you fulfil the many conditions of the RGESS scheme, you can claim an additional deduction of half the amount invested in the scheme.

Deduction under Sec 80CCG can be claimed for three consecutive financial years.

But there are limits. Investments up to only ₹50,000 in a financial year are considered. The maximum deduction is ₹25,000 (50 per cent of ₹50,000).

Tax saved is then ₹2,500 or ₹5,000, in the 10 and 20 per cent tax brackets. Investments are locked in for one year. After this, there is a two-year flexible lock-in period.

The minuses

Here is where it gets tricky. The rules governing the maintenance of investment levels in the flexible lock-in period are rather convoluted and can prove cumbersome.

Investment needs to be maintained at the level for which you claimed tax benefit, or (if you sell a stock) at the level before which you sold your investments, whichever is less.

This level needs to be maintained for 270 days in the year.

An RGESS mutual fund can invest in stocks of Government companies, IPOs or FPOs of Government companies, besides stocks belonging to the CNX 100 and BSE 100 indices.

The inclusion of these two indices does offer some flexibility in stock selection.

No track record

But with RGESS mutual funds being new, with a track record of just a year, it is hard to judge how they can perform across market cycles. With your investments locked in, poor performance can erode your wealth, reversing what is anyway a small saving through taxes. Tax-saving funds (ELSS), though they fall under the limit in Sec 80 C, are better bets than the RGESS funds primarily for that reason. Barring a few, these funds have at least a five-year history.

Their mettle in the volatile times of the past few years can, therefore, be better gauged before committing to a three-year lock-in. They also have a more flexible investment mandate, which allows them to take better advantage of market movements.

Solid gains

The funds making up the top quartile of performance over the five-year period averaged about 25 per cent annually.

Funds such as Franklin India Taxshield and Canara Robeco Equity Tax Saver, despite a strict large-cap strategy, have notched up solid gains of 25 and 27 per cent in the past five years.

Higher risk

Other funds also often include some mid- and small-cap stocks to pep up performance, though the risk here is a shade higher.

ICICI Pru Tax Plan, Axis Long Term Equity, Religare Invesco Tax Plan and HDFC Long Term Advantage all have some exposure to stocks with smaller market capitalisations. Those investors looking to save on taxes can invest in the top quartile funds mentioned here instead of the RGESS-compliant funds, despite there being no additional benefit.

Published on March 16, 2014

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