Despite a poor response to the Rajiv Gandhi Equity Savings Scheme (RGESS) tax benefit, some fund houses are proceeding with products eligible for it, hoping the problems of cost and procedure would ease.
HDFC, LIC Nomura and Birla Sun Life have launched or are in the process of launching their second round of products in this regard; Peerless plans to launch its first one later this year.
The previous round of products, launched last year, got a rather tepid response. Six new fund offers (NFOs) got a little less than Rs 40 crore from new investors eligible for tax benefits under RGESS. Investments from those not eligible for tax breaks helped fund houses meet the minimum Rs 10 crore required for an NFO to go through.
Under the RGESS scheme of the government, investors in the Rs 10 lakh annual income bracket who invested up to Rs 50,000 in such schemes are eligible for tax benefits. As on December 31, 2013, the total corpus under these schemes was Rs 258 crore, shows data from Value Research, an MF-tracking entity.
This year, the government raised the income limit for RGESS eligibility from Rs 10 lakh to Rs 12 lakh, and increased the period of the tax benefits to three years instead of one, for first-time investors. The response remains tepid, say insiders.
"There is not too much appetite for the product. The structure could get simplified further. And when it does, we will be ready with our product," said Akshay Gupta, chief executive officer (CEO), Peerless MF. The fund house has regulatory approval but plans to launch its RGESS scheme only in the next financial year (after April 1).
The head of a domestic fund house attributed the unenthusiastic response of investors to poor understanding of the product. He believes its design is flawed. "Why does the government only want to incentivise new investors? Tax sops should be given to all investors of this scheme," he said.
HDFC, IDBI, DSP BlackRock, Birla Sun Life, UTI and LIC Nomura were some of the fund houses which launched RGESS products last year. Distributors were paid a hefty five to eight per cent commission for the marketing and promotion. The commission wouldn't change this year, fund houses said.
"Since it is a three-year close-ended product, distributors were paid upfront commissions, compensating for the three years of lock-in. Which is why the commission structure seems high," said Nilesh Sathe, managing director and CEO, LIC Nomura.
Not all fund houses believe this is incentive enough for fund houses or dis tributors. Says a sector official, "The costs are not worth the product."
The process of getting first-time investors isn't easy. "Distributors found it difficult to target new customers; it increased costs for them. They had to first find investors within the Rs 12-lakh annual income bracket and then open new demat accounts for these. The process of reaching to new clients was so cumbersome that even if there was investor interest, distributors were unable to service them," said Debasish Mallick, MD & CEO, IDBI Asset Management. IDBI MF does not plan to launch a second RGESS product this year.