The government failed to lure Korean retail investors in U.S. stocks back to the local market even after introducing reshoring investment accounts (RIAs) in March, financial investment industry watchers said Thursday.

They said growing volatility in the domestic stock market has left retail investors increasingly fatigued, while interest in U.S. stocks has picked up again. Tax benefits alone are unlikely to reverse retail investors’ preference for U.S. stocks, as they tend to prioritize returns over tax savings, they added.

The RIA scheme was introduced to help stabilize the Korean won and shore up the local stock market. Under the program, investors can transfer overseas shares acquired by Dec. 23 last year to an RIA account at a Korean brokerage, sell them and invest the proceeds in local stocks or domestic equity funds for a year to qualify for a capital gains tax break.

The tax deduction was set at 80 percent for overseas shares settled by the end of July and falls to 50 percent for sales settled from August through December. The full 100 percent deduction expired at the end of May.

However, RIA accounts saw their first monthly outflow just four months after the scheme was launched, according to data from the Korea Financial Investment Association.

Total RIA balances fell to 2.13 trillion won ($1.5 billion) as of July 31, down about 500 billion won in two months from more than 2.6 trillion won at the end of May. This marked the first monthly decline since the scheme was introduced on March 23.

Investors are opting to close their tax-advantaged accounts early, mainly because of volatility in the domestic market and the burden of a mandatory one-year holding period, market analysts said.

Under the RIA framework, investors seeking capital gains tax exemptions on overseas stock sales must reinvest the proceeds in domestic equities or equity funds for at least one year. But a severe market downturn unsettled retail investors, with the benchmark KOSPI tumbling more than 20 percent in July alone.

By comparison, the tech-heavy Nasdaq index slipped about 2 percent over the same period.

Observers said retail investors were concerned that locking up their capital for a full year to save on taxes could ultimately result in significant losses to their principal if the domestic market continued to slump.

The shift away from Korean stocks is reflected in cross-border flows.

Korean investors’ net purchases of U.S. shares fell from $5 billion in January to $1.69 billion in March before turning to net sales of $469 million in April. As the domestic market became more volatile, however, the trend reversed, with net purchases reaching $633 million in June and surging to $4.67 billion in July. That was 18.2 percent higher than the $3.9 billion recorded in February, before the RIA scheme was launched.

“RIA shows the government’s willingness to bring overseas investment funds back to Korea, but it could restrict investors’ choices, as few people invest solely in domestic stocks,” a local brokerage official said.

“Investors want markets that rise over the long term. The sharp swings in the local market after its rapid rise have raised doubts over whether Korean stocks can replace the U.S. market as an investment destination."

Kim Dae-jong, a business professor at Sejong University, said uncertainty in the local market and liquidity restrictions on RIA accounts had prompted investors to pull out funds.

“For RIA to become a sustainable program, the government needs to make the scheme more flexible by easing the mandatory holding period and strengthening tax incentives,” Kim said.