The stock market boom looks very enticing, but retail investors still remain wary because of the way they have been gutted by the sudden scam-ignited busts over the last 10 years.

In the space of a decade, we have witnessed two major stock market scams, the collapse of the country’s biggest mutual fund, and the ripoffs by non-banking finance firms that have run into hundreds of crores.

In short, there were far too many bad experiences for the common man to digest.

But at long last, the Indian stock market seems to be emerging from its murky past. The ‘India Shining’ story seems to be selling, and there are signs that the retail investor is slowly coming back into the stock market.

The government did its bit last year to boost the capital market: it offered a tax-waiver on long-term gains on select blue-chip shares, and spared equity mutual funds from paying tax for distributing dividends.

(The tax-waiver on distribution of dividend, however, does not apply to debt funds, or those schemes that invest more in debt instruments than shares — for instance, monthly income plans and debt-oriented balanced funds. These schemes have to pay 12.81 per cent of the dividend paid out in tax and surcharge. The tax is paid out of the net asset value of the fund.)

The question facing the finance ministry is whether it should continue to promote the market so that long-term savings are diverted to shares from fixed-income assets that pay a pittance. Finance minister Jaswant Singh has already promised to continue with both the incentives offered in the budget for 2003-04 if voted back to power.

The promise of extension of tax-waiver on dividend distribution by equity schemes has been appreciated by fund managers who feel the government should continue to promote equity as an instrument for savings.

“Retail money is flowing back into equity funds, and should continue to do so,” says A. K. Sridhar, chief investment officer of UTI Mutual Fund.

“We received 24,000 applications for our Value Fund that was launched a few months ago. We haven’t had such tremendous response to an initial public offering for many years,” he says.

There’s no reason why this shouldn’t continue, says Sridhar, who expects equity schemes to deliver at least twice the return of debt funds this year. “There’s still appetite for sector-specific funds, and UTI is planning to launch a few soon,” he says.

Last week, the Bank of England raised interest rate and there is speculation that the US Federal Reserve will follow suit. Bankers in India reckon that interest rates have bottomed out and could go up. If it does, bond prices will fall and depress the NAV of debt funds. And that could trigger flow of more funds into equity schemes.

A section of mutual fund experts, however, feel the government could do more than offer plain vanilla tax sops to woo retail money into the stock market.

The government needs to offer sustained incentives to divert retail money into stock markets, says Dhirendra Kumar, a mutual fund analyst.

If offered the right incentives, equity-linked savings schemes (ELSS) could bring in a lot of retail money. However, the government hasn’t obliged as yet. ELSS offers tax benefits under section 88, but the maximum investment that qualifies for tax rebate is Rs 10,000.

“What is daunting is that your money is locked in for three years, and you can’t even transfer your money to another scheme even if the one in which you have invested isn’t performing. By allowing investors to switch between ELSS and increasing the amount that qualifies for tax rebate under section 88, the government could attract hundreds of crores,” says Kumar.