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Business News/ Opinion / Online-views/  RGESS is flawed in its construction. It should be scrapped
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RGESS is flawed in its construction. It should be scrapped

For the average investor there is a huge entry barrier in terms of paperwork.

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Mint, along with Bloomberg TV India, brings a new personal finance show called Smart Money. The weekly call-in show is hosted by Vivek Law, editor, Bloomberg TV India. Monika Halan, editor, Mint Money is the expert who takes viewers’ questions and debates issues around personal finance news and products. Edited transcript of the show that was aired over the weekend on Bloomberg TV.

Vivek: Monika, will the Rajiv Gandhi equity saving scheme (RGESS) really work?

Monika: First of all, it is difficult to enter the product as it is very complicated. Then, there are exit options that are complicated. And finally, after you jump through all the hoops, you get a maximum benefit of 5,000, which is just a one-time benefit. It is completely not worth it, according to me.

Vivek: The scheme clearly says that you need to have a demat account and that it is not applicable to anyone who has done any transaction till now. Could you elaborate a bit on difficulty to enter?

Monika: Right, you need a demat account and it should be the first investment that you will make. There is a whole list of attested documents that you need to produce. You need to do your know-your-client verification as well as an in-person verification. You have a whole list of paperwork, which is just a prelude to entering the product. You also need to sign a declaration stating that your income is less than 10 lakh a year. An average investor would find it easier to buy a gold coin. Hence, there is a huge entry barrier in terms of paperwork.

Vivek: We heard the finance minister say recently that in this budget he will try and make some changes. What should be done to make this an attractive scheme?

I have a radical solution. Scrap it. It’s a very sad scheme in terms of design. There is a three-year lock-in and after the first year of lock-in, you can churn your money in the next two years in case there is an emergency and you need funds. Now, equity is a long-term product and you invest for at least five years. And the scheme has a provision for churning for short term needs! Therefore, in its very construction, I see flaws.

The only way it will do well is through incentives. A lot of mutual funds (MFs) are pushing new fund offers. Again, I am going to say that it doesn’t work for you, especially in the smaller towns. We know the incentives are larger in MFs in the 15-plus metro cities. There is a lot of distributor pressure on that.

What the finance minister could do is make the equity-linked savings scheme (ELSS), the route through which people participate in equity markets. Direct participation is not a good idea. It has to be through equity linked products like MF. Or even the National Pension Scheme (NPS).

Vivek: Now let’s talk about the best ways to go about your financial planning. We all see that closer to March people start buying just about any product. In principle, how would you advise people to look at tax planning?

Monika: The financial products that you choose have to suit your situation and your particular problem. You have to look at it as a strategy rather than just tax planning.

Look at the products in the 80C basket and look at what you want. The first thing to look at is protection. If you are the main breadwinner and you need life insurance, then you should look at a life cover that is not just worth 1 lakh at a high premium. For a 30-year-old, look at premiums of around 8,000-8,500 a year for a life cover worth 1 crore. For a 40-year-old, the premium amount would be between 30,000 and 35,000 a year. We need to look at what is that we are buying.

Vivek: Are you saying that you should first look at a financial plan and then fit in products to suit the plan rather than the other way round, which is what most of us end up doing? For example, you made the point about protection. If you go and buy an insurance product, you get a cover as well as tax benefit. Your second step would probably be to look at investment, where if you need to be in equities then you could pick up ELSS.

Monika: Yes. If you want long-term products with zero risks, then there is the Employees’ Provident Fund (EPF) and the Public Provident Fund (PPF). These are government guaranteed products. You get exempt-exempt-exempt or EEE tax status on both. The rates of return are very good because they are tax happy. If you want to take a little bit of risk and you still want long term, then there is ELSS and NPS. The NPS is a long-term corpus building product launched by the government.

If you want medium-term products, look at five-year fixed deposits (FDs) and the National Savings Certificate. These, too, come under the 80C basket. From the point of view of a senior citizen, you don’t want corpus building, but income generation. Here, too, FD is a good option so is the Senior Citizens’ Saving Scheme, which gives a quarterly or an annual income.

Vivek: Avinash Panda is joining us from Mumbai. He is a young professional with a sizeable income but has no investments as of now.

Panda: I am 26 years old and work as a marketing manager for a bank. My annual salary is 8.78 lakh and my in-hand salary per month is 54,000. I have taken a bike loan for which I pay an equated monthly instalment (EMI) of 2,300. I save 40,000 a year through the provident fund. Right now, I have not invested anywhere due to which I am paying a lot of tax. I plan to buy a house for which I will take a loan of 26 lakh and its EMI will be around 23,000. Should I save the money right now rather than going for a loan and wait for a better time to buy the house?

Vivek: Monika, what is your advice for Avinash?

Monika: Looking at the money that Avinash has, I think before he starts off on the EMI, he should do some basic things. He should start off by creating an emergency fund. He should have at least three to four months of his living cost and his loan amount in an FD. It doesn’t cost too much to break an FD. It really makes a difference if you have an emergency fund in case something bad happens in your career. At 26, I would also start thinking about buying a life cover. You have till about 30 years of age to get a very cheap long-term cover. You should get a 30-year term plan. PPF is the first account that you should now open. I think you can easily put in 50,000-60,000 a year in it. After this, I don’t see too much money left. The simple rule of thumb is this 30% of your income can go as EMI. When you have that extra money, you can go for that loan.

Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.

Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30 pm, Sunday: 10:00am, 12:30pm and 05:30pm on Bloomberg TV India

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Published: 19 Feb 2013, 07:16 PM IST
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