ELSS Funds Lock-in Period - The Complete Guide| North Loop Official Blog
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27 Oct 2020

ELSS Funds Lock-in Period - The Complete Guide

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Introduction -

ELSS mutual funds are equity-oriented schemes with a lock-in period of three years that invest a large portion of their corpus into equity or equity-related instruments. They are open-ended schemes that also offer tax benefits under Section 80C of the Income Tax Act, 1961.

What is the ELSS lock-in period?

Before we look at the ELSS mutual fundslock-in period, let us understand the meaning of the term. A lock-in period in mutual funds refers to the period during which you are prohibited from redeeming the units of the fund, either partially or wholly. In mutual funds, ELSS funds are the only open-ended funds with a lock-in period. Once this period ends, you can stay invested in the fund for as long as you prefer or even choose to sell your mutual fund units.

For ELSS 3 year lock-in period, you have to wait for a minimum of three years before you can sell your investment. However, by investing in this ELSS 3-year lock-in period funds, you can qualify for tax exemption under the Income Tax Act up to Rs.150000 per annum. But the returns from the funds are taxable and get subjected to Short Term Capital Gains of 15% (for holding period less than one year) and Long Term Capital Gains of 10% for capital gains above Rs.100000 (holding period above one year). As compared to other tax-saving investments like Public Provident Fund, tax-saving Fixed Deposits, National Pension Scheme and National Savings Certificate, ELSS funds have the shortest lock-in period.

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Why is a lock-in period beneficial?

Lock-in period is useful as it allows reaping benefits from investing in equities by preventing reactions to small market movements. Having a lock-in period helps to stick to the investment for some time and ensures long term benefits. Mutual funds have a lock-in period to bring stability to the fund and to aid in preserving its liquidity. Excessive selling can cause an increase in redemptions and ultimately lead to liquidity issues for the fund. A lock-in period restricts selling of the units and keeps the fund’s assets stable so that you can enjoy significant benefits from it in the long run. Essentially a lock-in period helps to protect market stability and investor’s wealth.

How Does Lock-in Period Work in an ELSS Fund?

There are two ways of investing in an ELSS fund -

Invest a lump-sum - In this case, if you invest say Rs.1 lakh in an ELSS fund on a particular date when the NAV is Rs.100, your account gets credited with 1000 units of the fund. These entire 1000 units get locked in for three years from the date of investment in the fund.

Invest by way of Systematic Investment Plan (SIP) - The ELSS SIP lock-in period works by treating every credit of fund units as separate instalments. That means, if you plan to invest Rs.12000 in an ELSS fund on the first day of every month, you will receive a certain number of units of the fund depending on its current NAV. Now, ELSS SIP lock-in period considers each balance received every month as separate instalments. The three years ELSS lock-in for SIP of every instalment, therefore, gets counted from the date the units get received by you.

Let us say, if you receive fund units on 1st May 2020, the ELSS lock-in for SIP will end on 1st May 2023, and the lock-in period for units received on say 1st June 2020 will end on 1st June 2023 and so on.

What to do when the ELSS lock-in period ends?

Assess the performance of the scheme - Most experts recommend that you review your ELSS scheme once the lock-in period ends and analyse if it has performed well, has good prospects or not etc. It is best to consider several aspects of the fund to decide whether you want you to redeem the units or stay invested in it. If the fund is growing and in line with your financial goals, you can consider staying invested in the fund. However, professionals add that if the fund’s performance does not align with your goals, it is better to redeem the investment and invest in a new ELSS fund.

Redeem after the lock-in period ends - ELSS funds become a regular open-ended scheme once the lock-in period ends. However, most experts do not recommend redeeming the units immediately to invest in new ELSS funds, as this can get counter-productive to future financial goals. To reap significant benefits from equity investing, most suggest staying invested for at least five to ten years. Redeeming the units after the lock-in period usually gets justified in case of medical emergencies or sudden financial needs.

Conclusion -

The only difference between an ELSS and other equity schemes is the presence of a lock-in period. Like most other equity-oriented schemes, experts suggest investing for the long term to earn good returns.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.