29 March, 2012

Correct implementation of the new equity scheme is the key

The Finance Minister had delivered a googly in this budget, when he had introduced the Rajiv Gandhi Equity Savings Scheme.  This scheme is supposed to encourage the flow of financial instruments & improve the depth of domestic capital market. The scheme offers an income tax deduction of 50% for investments upto Rs.50,000 by new retail investors, whose annual income is below Rs.10 Lakhs. The scheme has a lock-in period of three years.

This seems to be a belated admission of the dwindling interest that the stock market has seen among our retail investors over the years and an effort to address that to some extent.  Having said that, one is not sure if permitting investors to invest in equities directly, would be such a good idea. It is especially a matter of concern as the scheme seeks to bring into it’s fold, new retail investors.

We need to await some further information on what constitutes a “new retail investor”. But irrespective of the actual definition, what we need to see is if such a scheme would be beneficial in the hands of a new retail investor. A new equity investor is one who by definition knows little about the markets and may rely solely on brokers or others, to guide him. This is fraught with danger as the investors may be misguided and may lose heavily, which will again fan a culture of aversion to equities. This is exactly the opposite of what is sought to be achieved.

If the government is serious about getting retail investors to invest in the stock markets, they should be allowed to invest in Index ETFs, as that is better way to participate in stock market for retail investors.  To provide variety and choice, they can be allowed to invest in different index ETFs. This way, they would not have to choose specific companies to invest in which is an exercise fraught with danger for them. 

The other way of allowing investors to participate in this scheme is through investments in Equity Mutual Fund schemes.  ELSS funds as it is, is a three year lock-in scheme and will hence lend itself admirably to this scheme. From a normal investor’s viewpoint, they also have abundant choice as there are dozens of ETFs to choose from. Since ETFs are managed by professional fund managers, retail investors need not have to worry about the underlying investments being made. 

Even among Mutual Fund schemes, it would be a good idea to open out the index fund category specifically, for this scheme. This kind of investment would take out the fund manager risk and would give market returns to investors, which in the long-term offers good returns.  Another good aspect of investing in this scheme through Mutual funds is the possibility of setting up an SIP. SIP allows an investor to invest small amounts in a disciplined way, month-on-month. SIP also would help the person take advantage of the volatility in the market and bring down the average buying price.

In sum, retail investors should be given a choice to invest in the index oriented instruments rather than individual stocks. This will ensure that those who now come into the market through this scheme stay engaged with the equity markets in times to come and hopefully bring more of their kind, once they taste success.

Published in Moneycontrol.com on 28/3/2012

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