No New Year cheer: RGESS may see muted response in FY14

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Dec 24 2013, 11:13am hrs
RGESS funds may see muted response from investors in FY14 as most fund houses are not keen on launching new schemes. Out of the six fund houses that launched a new close-ended RGESS scheme last fiscal, only two have filed with the market regulator to launch a new series.

At least two of these six fund houses have decided not launch a fresh series this year. Sundaram MF is the only fund house that has filed an offer document to launch an new RGESS scheme this fiscal.

The scheme was a near-disaster last year owing to operational difficulties such as finding first-time investors, opening new demat accounts and doing two separate KYCs for several first-time investors, said a fund house official. This year no one is even talking about the scheme.

Another fund official said theres way too much time and effort required to attract investors into the scheme, which is why his fund house had decided not to launch a new RGESS series this fiscal: Fund houses will come forward to launch new schemes only if the government does away with the income limit and the need to open a demat account.

Three of the six close-ended RGESS schemes that were launched earlier this year in March have beaten their underlying benchmark indices, data from Value Research shows. If the direct option is considered, five of these six schemes have outperformed their benchmarks.

The six new RGESS schemes manage about R240 crore in assets under management, with HDFC RGESS Series 1 Reg managing more than R100 crore. Also, 12 out of the 13 RGESS-compliant schemes have beaten their underlying benchmark indices during this period.

These were existing schemes that were brought under the RGESS ambit as they fulfilled the criteria for RGESS schemes. While the new RGESS schemes have been around for about eight months now, experts suggest this is too short a period to judge their performance.

The equity market has been performing well in the last couple of months, so it is difficult to judge the performance of these funds at this point. One will have to wait and watch how these funds perform for over a period of at least three years, said Sameer Hassija, senior investment analyst, Morningstar India.

Experts said performance alone won't help attract monies under the scheme unless the operational hurdles are addressed and tax sops are widened. Under the existing scheme, new retail investors are allowed to invest up to R50,000 directly in equities or through RGESS-compliant mutual funds and avail an income tax deduction of 50% of the amount invested.

Market participants believe this deduction limit ought to be increased to 100%. A 100% deduction makes a lot more sense from a tax perspective and will encourage more fund houses to launch new close-ended RGESS schemes, said Akshay Gupta, CEO, Peerless MF.

Earlier this year, finance minister P Chidambaram had raised the limit for investors wanting to invest in RGESS to R12 lakh from R10 lakh earlier. He also allowed investors to invest in mutual funds, while extending tax benefits for three successive years instead of one. RGESS is applicable to first-time investors who invest up to R50,000 and dont earn more than R12 lakh annually. Investors get to avail tax benefits under the new section 80CCG.