How does the lock-in of tax saving ELSS funds work?

Tax Saving ELSS Funds Lockin

Tax saving ELSS mutual fund is one of the best ways to participate in investments. Among a plethora of available options, ELSS mutual funds are considered as the best tool to save taxes as it generated very higher returns than the other funds historically. However, there is a little detail that needs some addressing to do: The Lock in period.

One of the benefits of ELSS mutual funds is its lowest lock in period. ELSS funds are locked in only for 3 years after which they can be redeemed or continued depending on the choices of the investor.

Note: The lock in period applies for the mutual fund units that you have purchased and not the investment amount. When the units complete three years of holding, then they are redeemed and your capital is available for withdrawal. There is no pressure to sell the units immediately after 3 years of purchase, you can continue investing or holding them as long as you wish to.

How does this lock in period work?
The working of Lock in period varies according to the method you choose to invest.

Lock in period in Lump sum investments:
Let's say you have invested ₹50000 in tax saving mutual funds on January 1, 2018 in one go. You buy 500 units at ₹100 each.These 500 units will be locked in for 3 years until January 1, 2021. On that day, all these units will be freed and you can redeem them any day after that.

Lock in period in SIPs:
If you have decided to break down your capital of ₹50000 and invest periodically, then your lock in period will vary for each set of units you buy. Let us say that this is how your periodic investments were made,

Amount invested in each installment –₹10000
No. of installments – 5
Total capital – ₹50000
Total number of units bought – 4485

                 ​SIP date ​              Price/ Unit ​      No.of Units bought
Instalment 1 ​01-12-2017 ​₹ 10 ​1000
Instalment 2
​01-03-2018₹ ​16​625
Instalment 3
​01-06-2018₹ ​8​1250
Instalment 4
​01-09-2018​₹ 11.11​900
Instalment 5
​01-12-2018₹ 14.08​710
  • On 1 December 2020, the first 1000 units will be accessible for withdrawal. The rest of the units cannot be withdrawn as each set has to complete 3 years individually.
  • The second, third and fourth sets will be ready for withdrawal on 1 march 2012, 1 June 2021 and 1 September 2021 respectively after each set has finished 3 years of lock in.
  • On December 1, 2021 all units will be ready for withdrawal.

Each instalment in SIPs is considered as a separate investment and hence has a 3 year lock inapiece.

Note: ELSS funds are best productive only when they are invested in for long term. Even though you are allowed to withdraw after 3 years, it is better to stay invested until unless you need them on urgent basis. Allow at least 5-7 years to pass before you decide to redeem them for a good harvest.

 

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.