You can invest up to Rs. 50,000 in an RGESS scheme and can claim a deduction of 50% on your investment amount by investing directly in equity shares of the top 100 companies listed on the stock exchange or buy closed-end RGESS mutual fund (MF) schemes or RGESS-enabled exchange-traded funds (ETFs). You should have never invested in equities or derivatives before putting money in an RGESS scheme and must have a demat account to be able to buy and sell RGESS. There is a lock-in of three years, but the government has allowed you some flexibility to exit after a year of your investment.
Complication No. 1
What Is Flexible Lock-In?
Though RGESS is a three-year closed-end scheme, it offers a flexible lock-in in the second and third year. But there's a catch. The rules state that though you can sell your RGESS-enabled shares or MF units in subsequent years but you must need to maintain your unit balance till the end of the third year.
This unit balance is the value of your RGESS account for which tax benefits have been claimed or the value of RGESS portfolio before the sale of such securities, whichever is less. In other words, the amount of money that you invest in the first year (for the first time in an RGESS scheme) is the balance that you need to maintain at the end of both your subsequent years, unless the value of your portfolio falls because of market volatility. In most circumstances, the value of RGESS units you need to buy (in order to maintain your balance) is the same as the value of units you sold in the first place (see table).
"The flexible lock-in makes sense for those investors who invest directly in equities, because it is possible for some investors to, initially, get into some wrong stocks. This facility allows you to remodel your portfolio", says Debasish Mallick, managing director, IDBI Asset Management Co Ltd.
Not many are convinced by the flexible lock-in. "Flexible lock-in would not have been required if the investment was restricted to a fund as in the case of equity-linked savings schemes. The fund manager would transact on the portfolio and enter/exit stocks to manage risk and deliver returns. We don't expect first-time retail investors to be active traders", says Anil Rego, CEO, Right Horizons, Bangalore-based financial planning firm.
Complication No. 2
What is form A and form B?
You should keep in mind these two forms if you wish to invest in an RGESS.
Form A is what you need to fill and give your depository participant before you make your first RGESS investment. This form will certify that you are, indeed, a first-time investor and are eligible to invest in an RGESS.
Once you buy RGESS, keep in mind form B. If you buy any RGESS eligible security, within the overall investment limit of Rs. 50,000, but don't want it to be counted as an RGESS investment (in other words, don't want it to be locked in), you need to give form B. This would mean that you can sell this security anytime you want and not be subject to a lock-in of three years.
If, however, you buy an RGESS eligible security beyond your R50,000 limit, don't bother giving any form. It will automatically not be counted as eligible for the RGESS scheme, even though it may be among the topmost 100 companies .
Complication No. 3
Who is a first-time investor?
Did you know that you may have invested in an equity mutual fund, but as far as RGESS is concerned, you are a fresh investor? In simple words, only if you have invested in equity shares of companies or derivatives in demat form, you would be prohibited to invest in RGESS. Everything else is exempted. You may have invested in equity mutual funds either in an account statement or demat form; you can invest in RGESS. You may have invested in bonds or debentures, either in physical or demat form; you are still considered as a first-time investor and can, therefore, buy RGESS.
There is a small catch though.
"Many government-owned banks that went for an initial public offering (IPO) in recent years also gave employee stock option plans (Esops) to their employees. These employees had to open a demat account but most of them just took the Esops and did nothing. Now they cannot invest in an RGESS", says Nilesh Sathe, chief executive officer, LIC Nomura MF.
(Ravindra Sonavane contributed to this story)