How does 3 year lock-in period work in ELSS while investing via SIP?

Short Answer

ELSS or Equity Linked Savings Scheme is a type of tax-saving investment instrument. It provides returns, similar to equity funds and offers a tax reduction under Section 80C. If you invest in a SIP method, every contribution towards the scheme will be considered as a separate investment and will incur a 3 year lock-in period.

Detailed Answer

What is an ELSS Mutual Fund?

An ELSS or Equity Linked Savings Scheme is a type of mutual fund that offers equity-like returns and also comes with some tax benefits. By investing in an ELSS scheme, you can claim a tax rebate of up to Rs 1,50,000 in a financial year under Section 80C.

ELSS Funds come with a 3-year lock-in period, only after which you can redeem your funds. Once you invest in an ELSS fund, you cannot sell the units before 3 years. This type of fund is similar to equity mutual funds as a majority (minimum of 65%) of your funds are invested in equity. It is also a long-term instrument due to its lock-in period. You can invest in an ELSS scheme in a lump-sum method or invest under a Systematic Investment Plan (SIP).

How is the lock-in period calculated in the case of SIP?

Now that you know, ELSS mutual funds come with a 3-year lock-in period, the question arises how is the lock-in on SIPs calculated. Hence, to begin with, every investment in an ELSS scheme is considered a separate investment and comprises its individual lock-in period. Let's understand this with an example.

Suppose you start a monthly SIP for 3 months starting on the 1st of May, 2020. Every month you invest Rs 10,000 in your chosen ELSS fund. Now the 3 investments would be made on 1st May, 1st June, and on 1st of July of 2020.

Therefore, the lock-in period will end for the funds invested on 1st May 2020 on 1st May 2023. The remaining funds will be available for redemption on 1st June 2023 and 1st July 2023. In this way, you can calculate the lock-in period of an ELSS fund.

If you had continued your SIP for longer than 3 months, then all the investments will incur a 3 year lock-in period. If you wish to redeem any amount from the fund, you will only be able to redeem the units that have completed the 3-year lock-in.

Tagged With: elsssystematic investment planmutual fundequity mutual fundlock in period
Categories: Mutual Funds
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