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Direct equity investment with lock-in not for first-time investors,say experts

The scheme allows 50 per cent or Rs 25,000 deduction on an investment of Rs 50,000 by individuals directly into equity.

Written by Sandeep Singh | Mumbai | Published: March 22, 2012 1:06 am

Luring first-time investors into direct equity as proposed by the Rajiv Gandhi Equity Savings Scheme announced in the Budget is not a good idea,according to market and personal finance experts. The scheme allows 50 per cent or Rs 25,000 deduction on an investment of Rs 50,000 by individuals directly into equity.

According to finance ministry officials,the universe available for investment would be limited to the top 100 companies listed in the BSE. The move is not comforting and first-time investors should exercise caution,say experts.

The scheme is open only for individuals with annual income of less than Rs 10 lakh and has three year lock-in. It offers cumulative benefits of up to Rs 5,150 over three years (Rs 1,716 per annum) for those falling in the 20 per cent tax slab. For those in the 10 per cent tax bracket,the benefit adds up to Rs 2,575 over three years or Rs 858 per annum.

“Luring first time investors into direct equity through a tax benefit is not a good idea and is full of risks especially given the lock-in requirement since liquidity is a big ingredient to equity markets. If at all,equity investments should be through mutual funds where the investor is not holding a stock,where the scheme is managed by a fund manager who keeps rebalancing the portfolio depending on performance,” said Prithvi Haldea,managing director,Prime Database.

Experts are not very comfortable with the idea of BSE 100 companies since this does not necessarily mean the company will do well for three years.

If the stock that an investor chooses to invest in does not perform well then he has to sit with it for three years because of the lock-in requirement.

Haldea said that if the government is looking to increase the base then it can extend this scheme to PSU IPOs where the pricing is reasonable and most of them have done well in the long run: “In such a case,the investor takes a call on the government and not on the company.”

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