The meaning of lock in period varies for different investment instruments. Basically, a lock-in period is a time frame during which the investor cannot redeem their investments. And even if they do so, there is a penalty involved which can be quite an unpleasant one. Let us understand the lock-in period of ELSS funds and also find out why investors should remain invested even after the lock in period ends.
What is a lock-in period in mutual funds?
Suppose you invest in a mutual fund scheme that has a one year lock-in period. You make an investment in January 2022. If this particular scheme has a one year lock in period, this means that you can only sell your investment after January 2023. In simple words, when investors invest in mutual funds either via lump-sum or through the Systematic Investment Plan (SIP), they are allotted units in quantum with the investment sum. If the units of the scheme in which they invested have a predetermined lock in period, investors cannot redeem these units until the lock-in period is over.
While most investors identify mutual fund schemes as actively managed funds and passively managed funds, mutual funds can also be categorized as open ended schemes and close ended schemes. All close ended schemes have a predefined lock in the period, but ELSS is the only open ended mutual fund scheme that comes with a statutory lock in of three years. This lock-in period is applicable for both SIP and lump-sum investments.
How can ELSS investors calculate lock-in period?
The lock-in period for SIP and lumpsum works in different ways. Investors must not confuse themselves as this is important.
Here’s an example of how the ELSS lock-in form lump-sum works –
An individual can redeem the 15,00,000 units (NAV Rs. 15 and Rs. 1,00,000 invested on 1st Mar 2017) of mutual funds after 1st March 2020.
For SIP it’s a bit different. For those who aren’t aware, a Systematic Investment Plan is a simple and effective way to invest in an ELSS fund. Investors have to decide on a fixed sum beforehand and then invest this sum at periodic intervals in the ELSS fund. SIPs have different durations like weekly, quarterly, annually, biannually, etc. However, most salaried individuals prefer the monthly option as this way they save and invest a fixed sum every month. Investors who aren’t sure about the wealth they can earn with the ELSS investments at the end of the lock-in period can use the SIP calculator, a free online tool.
It is important for every SIP installment to complete a three year lock-in period so that investors can redeem the units.
Here’s an example illustrating how the lock-in period for ELSS works with SIP investments –
Assuming that on every 3rd of the month, a SIP investment of Rs.10,000 is made in the ELSS fund. And below units are purchased based on the NAV on that date:
3rd Jan 2021- 50 units bought
3rd Feb 2021- 40 units bought
3rd Mar 2021- 70 units bought…
So, for the SIP investments, one can redeem the units from the following dates respectively:
3rd Jan 2024- 60 units
3rd Feb 2024- 40 units
3rd Mar 2024- 70 units
The lock-in period for this tax saver fund can actually allow an individual to compound their wealth and grow their corpus. Since one has to invest in a tax saving instrument till they retire, investors can even consider remaining invested in ELSS funds for a longer duration than its lock-in period.