ELSS lock-in period

Updated on: Jan 11th, 2022


4 min read

What is a lock-in period in mutual funds

The lock-in period in mutual funds means the investor cannot redeem the units before completing a predetermined period from the date of investment. The redemption is based on the units invested. There are tax saver mutual funds that are available with a minimum of three years lock-in period. Mutual funds are of two types, namely, open-ended and close-ended. Close-ended mutual funds are always with a lock-in period, whereas ELSS is the only open-ended type of mutual fund with three years of the lock-in period. The lock-in period is for both lump sum and SIP investment.  

Why the lock-in period is important

The lock-in period is essential for both investors as well as the mutual fund. To reap the benefits of investing in mutual funds, one should keep it for the long term. An investor can stick to the period and get capital appreciation to benefit from long term investment. In ELSS, the investor also receives the tax benefit.  

For mutual funds, the lock-in period induces stability in the funds. Otherwise, it may cause liquidity issues through excessive selling. It restricts the frequent withdrawal of funds by the investors so that they can reap maximum benefits. 

How to calculate the lock-in period

The lock-in period of lump-sum investment ends after the end of three years from the investment date.

For example, One can redeem the 60 units (NAV Rs.500 and Rs.30,000 invested on 1st Mar 2017) of mutual funds after 1st March 2020.

However, if the investment is made in the SIP of ELSS funds, then the lock-in period shall end after three years of every SIP instalment. SIP instalment can be monthly, quarterly, etc. Every instalment of SIP must complete a three years lock-in period.

For example: Assuming that on every 5th of the month, Rs.5,000 investment in SIP. And below units are purchased based on the NAV on that date:

5th Jan 2017- 60 units purchased

5th Feb 2017- 57 units purchased

5th Mar 2017- 61 units purchased and so on

So for the above investment, one can redeem from the following dates respectively:

5th Jan 2020- 60 units 

5th Feb 2020- 57 units 

5th Mar 2020- 61 units 

What to do after the lock-in period ends

As soon as the lock-in period ends, it is unnecessary to exit the investment and redeem the funds. One can continue with the acquisition. Review the fund’s past performance and analyse the market impact on its mutual funds and returns. One may compare other ELSS mutual funds schemes’ performance and re-invest the amount redeemed to save tax. The ELSS fund is open-ended. Hence you can anytime withdraw the amount. If there is no emergency fund needed, investing for 5-10 years would reap good returns. 

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Quick Summary

Lock-in period in mutual funds restricts redemption before a certain time. It is important for investor benefits and fund stability. Calculate lock-in periods based on SIP or lump-sum investments. Post lock-in, review fund performance and consider re-investing. Direct funds save taxes and offer better returns.

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