ELSS Lock in Period

What Do You Mean by The Lock-In Period in An ELSS Fund?

Investors encounter lock-in periods with financial instruments such as ELSS funds, tax-saving Fixed Deposits, close-ended mutual funds, hedge funds, PPF, and more. During this duration, you are unable to liquidate or sell your investments. Nonetheless, once the lock-in period concludes, you can sell your investments.
Lock-in periods are commonly associated with mutual funds, particularly close-ended funds, which mandate a lock-in period of 3 to 5 years. These funds impose limitations on both the entry and exit of investments, preventing investors from seeking short-term gains with potentially higher returns.
 

About The Lock-In Period and Investing Methods

There are two different ways of investing in an ELSS fund, such as:

Lump-Sum  

In a lump sum investment, a substantial amount of money is allocated to purchase units of a mutual fund scheme. Investors with a substantial investment and a high-risk tolerance often choose this approach to take advantage of market downturns. The ELSS Lock-in Period for a lump sum investment begins on the day of purchase, restricting the redemption or sale of the invested amount until the ELSS Lock-in Period expires.

SIP

By choosing a Systematic Investment Plan, you can acquire units of ELSS funds through regular and smaller investments at predetermined intervals. You can select the investment amount and the frequency at which you want to contribute to the fund.
Once you establish a debit mandate with your bank, the SIP is set in motion automatically, and units are purchased at the Net Asset Value (NAV) on the debit date. However, the treatment of the ELSS Lock-in Period differs slightly when investing via SIP.
 

Advantages of ELSS Funds

●    Tax Savings

When investing in the ELSS fund, it will be qualified for a tax deduction of up to ₹150,000 in the current financial year. This unique scheme allows investors to save on taxes while potentially earning significant returns from their investments in equity funds.

●    Short Lock-in Period 

ELSS stands out with its comparatively short ELSS Lock-in Period of three years, in contrast to other tax-saving alternatives requiring a minimum of 5 years. Compared to options like a 15-year lock-in period for PPF or a 5-year lock-in period for Fixed Deposit, ELSS offers the advantage of higher returns coupled with the shortest lock-in duration.

●    Provide Long-Term Return

y refraining from redeeming the funds beyond the prescribed ELSS Lock-in Period of three years, investors have the potential to witness their investments grow. Since these funds primarily invest in equities, significant wealth accumulation can occur over a period of time.

●    Inculcates the Saving Habit

Through the SIP, you can invest in ELSS schemes with a minimum amount of Rs 500 per month. This regular and affordable investment option allows you to witness the growth of your wealth over time as you continue with your monthly contributions.

●    Higher Returns

ELSS funds, being invested in equities, have the potential to generate higher returns from the market. Compared to a simple savings scheme, ELSS funds can provide twice or even more returns. On average, historical data indicates that ELSS funds have delivered approximately 12% returns over ten years. This notable return increase contrasts schemes like PPF, which typically generate around 8% returns.
 

Tax Benefits

Investors who invest in ELSS funds can take advantage of tax deductions. Also, individuals can claim a deduction of up to Rs. 1.5 lakhs specifically for investments made in ELSS funds. It's important to note that this tax deduction applies to the overall investments made under Section 80C regulations.
Additionally, in accordance with Section 80C, the capital gains obtained from ELSS investments fall under the category of Long-Term Capital Gains (LTCG) due to the three-year ELSS Lock-in Period. These gains are subject to taxation based on the prevailing tax laws. However, LTCG up to Rs. 1 lakh per financial year is exempt from taxation. It's crucial to remember that dividends earned from ELSS funds remain taxable according to your applicable income tax slab.
While being aware of the tax benefits associated with ELSS funds, it is equally important to understand the redemption process for these funds.
 

What Can You Do When the Lock-in Period Ends?

Upon the expiration of the lock-in period, there is no compulsion to exit the investment and redeem the funds. Instead, investors can continue with the acquisition and assess the fund's historical performance while considering the market's influence on mutual funds and returns. You must compare the performance of other ELSS mutual fund schemes and potentially reinvest the redeemed amount to avail further tax savings.
Since ELSS funds are open-ended, investors can withdraw the invested amount anytime. However, if there is no immediate requirement for an emergency fund, investing in ELSS funds for 5-10 years is likely to yield favourable returns.
 

How To Invest in ELSS Funds?

You can invest in an ELSS tax-saving mutual fund: a lump sum or a Systematic Investment Plan (SIP). It's important to remember that the ELSS Lock-in Period calculation will differ based on the chosen investment method. For SIP investments in ELSS mutual funds, the lock-in period will be calculated from the starting date of each investment. 

Conclusion

So, as per the ELSS lock-in period meaning, it offers an ideal solution for individuals seeking tax savings and wealth creation. By investing in ELSS, you can save up to Rs. 1,50,000 in taxes within a financial year while enjoying the opportunity to achieve higher returns than similar investment options. ELSS also boasts the lowest ELSS Lock-in Period among tax-saving investments, allowing you the flexibility to remain invested for an extended duration if desired.
To begin your ELSS investment journey, explore options and select funds based on their performance history. By thoroughly evaluating their past performance, you can make informed decisions and align your investments with your financial goals. Take advantage of the benefits offered by ELSS and initiate your investment in this tax-saving avenue today.