One of the most successful investors of all time, Warren Buffett, once said: “Never depend on a single income. Make investments to create a second source”. A mutual fund is one of the most popular investment strategies and an ELSS or Equity-linked Savings Scheme is a popular category of mutual fund.
Read on to know all about ELSS and the lock-in period that these schemes attract. But, first, let’s get our basics in place.
What is a Mutual Fund?
In a Mutual fund, a group of investors buy units in an investment scheme offered by asset management companies and brokers. These investors pool in money and invest in various assets like stocks, bonds and other securities through these fund houses to reduce the risks.
On behalf of the investors, the asset management company or fund house hires fund managers to manage the investment. The investors buy “units” of a particular scheme from the asset management company or through a registered broker. Each unit represents the investor’s ownership of the fund.
Mutual funds are classified into various categories, and an investor can choose which to invest in based on several factors like their investment objectives, risk appetite, asset class etc.
Now, what is ELSS?
An Equity-linked Savings Scheme (ELSS) is a mutual fund scheme that invests primarily in equity or equity-linked securities. Investing in an ELSS helps investors save tax. Under Section 80 C of the Income Tax Act of 1961, certain investments offer investor tax benefits. An ELSS is one such instrument.
By investing in an ELSS, you can reduce your taxable income by upto Rs. 1.5 lakh per annum if you fall under the highest tax bracket of 30%. This, in turn, will help you save up to Rs. 46,800 in taxes each year.
It is vital to note that ELSS is an open-end fund, but it has a lock-in period that restricts investors from withdrawing funds within a specified period.
What is a lock in period in an ELSS fund?
When you buy units in an ELSS, you cannot redeem them for three years from when you first purchased these units. This mandatory investment period is known as the lock-in period. It doesn't matter if you choose to invest in ELSS via lump-sum or a Systematic Investment Plan (SIP); this lock-in period applies to both.
Let us look at how the lock-in period is determined in an ELSS fund.
Lump-sum investment
A lump-sum payment is when you pay the entire amount needed to invest in the ELSS fund at the beginning of the investment.
Under this method, you cannot sell your units of an ELSS fund for a minimum of three years from when you made the purchase.
Suppose you have invested in an ELSS fund via a lump sum payment of ₹10,000 on October 21st, 2021; you cannot sell these units until October 21st, 2024.
Investment via SIP
An SIP is where you make small payments at regular intervals to invest in the same fund.
Under this method, suppose you plan to invest ₹2,000 every month for five months from October 21st, 2021; your lock-in period would be a minimum of 3 years for every monthly payment.
Meaning :
| Date of purchase | Amount invested | Lock in period ends on |
| 21st October 2021 | ₹2000 – 22 units purchased at a net asset value of ₹91 | 21st October 2024 |
| 21st November 2021 | ₹2000 – 31 units purchased at a value of ₹64.5 | 21st November 2024 |
| 21st December 2021 | ₹2000 - 15 units purchased at a value of ₹133.3 | 21st December 2024 |
| 21st January 2022 | ₹2000 - 41 units purchased at a value of ₹48.7 | 21st January 2025 |
It is important to note that you don’t have to mandatorily redeem the units after the lock-in period. You can choose to stay invested and build your wealth over the long term. And that’s how ELSS offers you a two-in-one benefit - tax saving and wealth creation.
Can you redeem your investment before the lock in period ends?
No. You cannot redeem your investment before the three year lock-in period ends. So, do not go investing money that you need in the immediate future in equity linked schemes.
Conclusion
While you could choose to sell your units in an ELSS fund once the mandatory period of three-year ends, there are other factors to consider before you exit from the fund.
You may want to check out the returns the fund has been generating. Also, you can monitor the volatility of the market when you want to sell the units. While investing in equity, investors are advised to hold their investments for the long-term which would be around 7-10 years. So, if you are not in immediate need of funds, you may consider staying invested in the scheme for a period longer than the mandatory lock-in period.