Mutual Funds: As we inch closer to the end of the financial year, many investors might be considering investing in equity-linked savings schemes i.e. ELSS mutual funds. The reason why they invest in ELSS mutual funds shouldn’t come as a surprise for two reasons. One, they offer inflation-beating returns and two, among all the tax-saving investment options available, they have the shortest lock-in period – three years. For instance – the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) have a lock-in period of 15 long years. Even tax-saving fixed deposits come with a lock-in of 5 years.
But is the lock-in period truly three years for ELSS, or is catch that investors should be aware of? How lock-in is calculated depends on the mode of investment. It is calculated differently for SIP investors and lump sum investors.
If you invest via lump sum
The lock-in calculation is simple and straightforward if you invest a lump sum amount in an ELSS mutual fund. You have to calculate the three-year period from the date of investment. For instance, if you invest ₹1.5 lakh in an ELSS mutual fund on 31 March 2022, you can redeem the entire corpus (investment amount and gains) anytime after 31 March 2025. But if you invest via SIP, the math is different.
If you invest via SIP
If SIP is your investment mode, the calculation is not that straightforward. In this scenario, the lock-in is calculated using the First-In-First-Out (FIFO) method. According to this method, each SIP instalment must complete the three-year lock-in period individually.
Illustration
Let’s say you made your first SIP investment on 5 January 2022, second on 5 February 2022, third on 5 March 2022 and last one on 5 January 2025. In this case you will be able to withdraw only the first SIP instalment and gains earned on it after 5 January 2025. Similarly, your second SIP will mature after 5 February 2025, the third after 5 March 2025 and so on. Hence, if you wish to redeem the entire corpus, you need to calculate the three-year period from the last date of your SIP. In our example, it would be 5 January 2028. The unforeseen advantage is that the longer you stay invested, the more your wealth grows through compounding.
How do ELSS fund invest?
As per regulations, ELSS mutual funds are required to invest at least 80 percent of their total assets in equity and equity related instruments. Unlike other mutual fund categories, they have the freedom to decide the allocation between large caps, mid caps and small caps. These mutual funds are subject to market risks similar to that experienced while investing directly in equities.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
