What To Do When The ELSS Funds Lock-In Period Ends?

by Shashank Bhaskar Finance Adviser

Equity Linked Savings Schemes should not be mistaken solely as tax-saving instruments. It is beyond that. An Equity Mutual Fund produces stable long-term returns by investing primarily in Equities. It is a type of Equity Fund with a three-year lock-in duration.

After looking through many previous reports and analyses, it is understood that continuing to remain invested in ELSS Funds after the lock-in is a wise decision. Here are the other options you have when the ELSS three-year lock-in term ends:

Many investors withdraw from ELSS right after three years of lock-in and often use the same sum to invest in fresh ELSS to claim a tax gain for that year. This is not a smart strategy as your resources do not expand and jeopardise the achievement of future financial objectives. There is also a risk that the returns may be sub-par after three years of expiry. For ELSS Funds, the ideal investment period is around five years.

Investors should check the performance of the fund they have invested in. If the scheme has been underperforming than the benchmark, then the investment gets transferred to other open-ended Equity for better returns in future. Many Mutual Fund apps are available to guide and monitor your fund performance.

ELSS Mutual Funds invest like a Multi-Cap Fund as they do not have a fixed set structure. They invest across the market capitalisation with a tilt towards Large Caps in most cases. Analyse and compare the past returns given by the ELSS Fund with the other Large-Caps on risk-adjusted returns. Continue investing in your ELSS and approach it like MultI Caps if your scheme offers higher returns with lower volatility.
Usually, people do not leave only because the lock-in duration is over. But if the need for money emerges, you need to redeem once the lock-in time is over. When the lock-in is over, 20-30% exits happen, but not in one go. Note that you need not refund the whole amount either. You can withdraw a small part of the ELSS Funds.
Tax Saving Funds only gets encashed when a significant financial target has been achieved or a medical or other financial emergency arises within the family. Remember, ELSS Investment becomes open-ended after the initial lock-in duration of three years, and investors withdraw it in a lump sum or small amounts. There is no exit load and no taxes

ELSS provides an excellent route to grow your capital over time and save tax. The best way to invest in an ELSS, like other Equity Funds, is via SIPs. Plan and spread the investment, thereby reducing the chances of entering the market at the wrong time.