The Securities and Exchange Board of India (Sebi) Chairman U K Sinha on Saturday said the capital markets regulator had asked the Union government to allow investments in mutual funds to be made eligible for tax exemptions under the Rajiv Gandhi Equity Savings Scheme (RGESS), announced in this year's Budget.
RGESS would allow new retail investors putting in up to Rs 50,000 directly in equities an income tax deduction of 50 per cent. The scheme would have a lock-in period of three years and investors with annual income of less than Rs 10 lakh would be eligible for the scheme.
Sinha said the proposed Direct Taxes Code had cast doubts on the availability of tax sops for the equity-linked savings schemes (ELSS) that were currently eligible for tax exemption under Section 80C of the IT Act. "It may not be advisable for first-time investors to directly take part in equities. It would be better if they enter through a proper investment vehicle like mutual funds," he added.
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The revised draft of the code has included ELSS in investments eligible for tax sops, but the mutual fund industry is jittery and has been lobbying to get RGESS routed through it.
The industry has also been quietly pushing for the return of the entry-load regime, citing loss of folios and outflow of investments.
When asked by Business Standard if there were plans to return to the entry-load regime, Sinha said the regulator was reviewing the prospects of the asset management industry, but "it is premature to say what steps will be taken. A group of people have commenced work on it", he said. Sinha added Sebi was also aware of the fact that the loss of folios and assets could also be a function of market conditions that had continued to remain unfavourable.
His statements cheered the industry, which has been struggling to check outflows.
Industry experts say the move to include MFs in RGESS, if implemented in the desired manner, may end up pouring up to Rs 50,000 crore of retail inflows a year for long-term funds. This will exceed the funds brought in by foreign investors. The money would not only boost India's capital markets but also bring stability, as these funds will be stickier.
Value Research Chief Executive Officer (CEO) Dhirendra Kumar had earlier said: "The RGESS proposal has a huge potential to attract funds from retail investors. But, new investors putting in money directly into equities, because of their inexperience, could prove disastrous."
Reliance Mutual Fund CEO Sundeep Sikka says: "It is a good move. Any first-time investor coming to stock markets should come through mutual funds and not directly invest in stocks. It will help route household savings into capital markets."
Taurus Mutual Fund CEO Waqar Naqvi agrees. He says: "Investment in direct equities by new investors is a hazardous route." Peerless Mutual Fund CEO Akshay Gupta says: "I hope government listens to Sebi."
Fund managers said it would be good if RGESS replaced the existing ELSS, but added, even if it was not so, they would be happy to have diversified large-cap fund, which has tax benefits for investors, under RGESS. They also added that such schemes should allow investors to invest through the systematic investment plan (SIP) route.
HDFC Mutual Fund CEO Milind Barve says: "We have been supporting RGESS to be implemented through mutual funds. Even if investors put in money through SIP of around Rs 4,000 a month, the investment made so will be close to half a lakh rupees."