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Thursday, January 24, 2013

Should you invest in Rajiv Gandhi Equity Savings Scheme (RESS)?

SEBI Chairman UK Sinha certainly does not think so if you are a first time investor into stock markets. On a recent opinion provided by the SEBI to government UK SINHA former Chairman of UTI Assset Management Company indicated his reservations about first time retail investors investing in Rajiv Gandhi Equity Savings Scheme (RESS).

Introduction of RESS(Rajiv Gandhi Equity Scheme)

Finance Minister in his Budget had recommended introduction of Rajiv Gandhi Equity Savings Scheme for investors. The rational was the extremely low penetration of retail investors in the Indian Equity Markets. This scheme is conceived to encourage participation by new retail investors in Indian Stocks.

Why the Government is keen on Retail Participation in Indian Equity Markets?

While average Indian buying into equity markets is increasing by each passing day. However, it still cannot compare to the interests and levels of buying/consumption made by Indians in Gold and other savings instruments. The quantum of investments in Bank Fixed deposits and Gold is multiple times more than the investments in equity markets. Banks are still considered to be safe and sound investment option compared to stocks. Government is keen on changing this investment pattern and move towards enhanced in stock markets. While any economy prefers to have a balanced portfolio of spread across various assets classes. The ratio of investments by Indians is skewed towards the Deposits and Gold. Such high is the proportion of these investments that is has become the cause of worry for the government.

Buying Gold means Losing Foreign Currency

India is not a producer of Gold. So all the gold has to be imported, causing huge loss of precious foreign currency. The more gold we buy, the more needs to be imported, causing more drain on the precious little foreign currency (mostly it is US Dollar) India holds. Most of it gets exhausted in buying Gold.

How does the Government encourage you invest in equity markets?

Government is introducing RESS providing Tax Deductions to retails investors participating in the Indian Equity Markets. This deduction would be available under probably section 80C to salaried retail investors. This is an incentive being provided by the government to motivate new investors who traditionally invested in bank deposits and gold by granting them tax deduction to the taxable income for that financial year.

Should you invest in this scheme?

Well, that is the million dollar question. Though, the purpose of investing in this scheme is to provide a stepping stone into the Indian Equity markets for new investors by the government. SEBI Chairman does not think that the new investors would be exposing themselves to the right platform to begin their journey into the financial markets. I guess the SEBI Chairman who knows markets, market men and governments would know, what he is saying.

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