Financial advisors recommend mutual fund schemes to investors as a diversified portfolio of stocks is less risky than individual stocks.
Mutual funds are getting ready to cash in on the Rajiv Gandhi Equity Savings Scheme (RGESS). Fund houses such as LIC Mutual Fund, UTI, IDBIBSE -0.80 % and DSP BlackRock have already announced their plans to launch RGESS compliant schemes. As per the provisions of RGESS, individuals with a gross annual income of Rs 10 lakh or less caninvest up to Rs 50,000 and claim tax deduction underSection 80CCG. However, only first time investors, who route their investments through the demat account opened on or after November 23, 2012, or demat accounts which have not yet been used for equity investments qualify for the tax break.
Individuals can invest in either these NFOs or in directequities (any stock belonging to BSE 100 or NSE CNX 100, equity shares of Maharatnas or Navratnas) or they can buy units of exchange traded funds (ETFs) investing in RGESS eligible shares. "Over longer period of time, equity is one of the best asset classes. For first time investors, this scheme helps save tax and build an equity portfolio over the long-term," saysSatish Menon, executive director, Geojit BNP Paribas Financial ServicesBSE -1.89 %.
"Small investors will find it difficult to build an equity portfolio with a small amount of Rs 50,000. Also they will find it difficult to track these investments on their own. Hence investors should use the mutual fund route to reduce risk and build a diversified equity portfolio," says Anup Bhaiya, MD and CEO, Money Honey Financial Services.
MUTUAL FUNDS V/S DIRECT EQUITY
As you can see from the arguments, many financial advisors believe that first-time investors in the stock market shouldn't invest in stocks on their own, as they wouldn't have the necessary knowledge to research and monitor the stock or stocks of their choice. Also, they won't have the emotional maturity to deal with the ups and downs of the market. That is why financial advisors recommend mutual fund schemes to investors as a diversified portfolio of stocks is less risky than individual stocks.
"First-time retail investors should invest in a carefully constructed portfolio of securities rather than taking exposure through a single stock or a basket of a few stocks. This also helps investors manage the downside risk," says Ajit Menon, EVP and head of sales at DSP BlackRock Investment Managers.
The NFO of DSP Blackrock RGESS - Series 1 is currently open and closes on March 8. Moreover, buying stocks directly could prove risky because investments under RGESS come with a lock-in period. There is fixed lock-in period in the first year, when you cannot sell, pledge or hypothecate the shares. The lock-in is flexible for the remaining two years. You can sell, but will have to buy other eligible securities with the proceeds.
