Mutual Funds: Do you want to put money into ELSS? This is how lock-in operates.

Is the lock-in time for ELSS funds actually three years, or is there a catch that investors need to be aware of? The method of investment determines how lock-in is computed. For lump sum and SIP investors, it is computed differently.

Many investors may be thinking about investing in equity-linked savings schemes, or ELSS mutual funds, as the fiscal year draws to a conclusion. For two reasons, it shouldn't be shocking that they invest in ELSS mutual funds. They feature the shortest lock-in period of any tax-saving investment option—three years—and they provide returns that beat inflation. For example, there is a 15-year lock-in period for the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY). There is a five-year lock-in period even for tax-saving fixed deposits. But does ELSS really have a three-year lock-in period, or is there a catch that investors need to know about? The method of investment determines how lock-in is computed. For lump sum and SIP investors, it is computed differently. If you make a lump sum investment

 If you invest a lump sum money in an ELSS mutual fund, the lock-in computation is easy to understand. The three-year timeframe from the investment date must be calculated. You can redeem the whole corpus (investment amount and gains) at any time after March 31, 2025, for example, if you invest ₹1.5 lakh in an ELSS mutual fund on March 31, 2022. The calculations change, though, if you invest through SIP.

If you use SIP to invest

If you want to invest through SIP, the computation is more complicated. In this case, the First-In-First-Out (FIFO) approach is used to determine the lock-in. This approach requires that each SIP installment finish the three-year lock-in period on its own.

Assume that you invested in SIP for the first time on January 5, 2022, then again on February 5, 2022, March 5, 2022, and January 5, 2025. Only the first SIP installment and any profits made after January 5, 2025, may be withdrawn in this scenario. Your third SIP will mature after March 5, 2025, your second after February 5, 2025, and so forth. Therefore, you must determine the three-year period from the last day of your SIP if you want to redeem the entire corpus. It would be January 5, 2028, in our scenario. The unanticipated benefit is that compound interest increases your wealth the longer you remain invested. ELSS funds: how do they invest? Regulations stipulate that ELSS mutual funds must allocate at least 80% of their total assets to equity and equity-related securities. They are free to choose how much to allocate to large, mid, and small-cap stocks, unlike other mutual fund categories. The market risks associated with these mutual funds are comparable to those incurred when making direct stock investments.

Disclaimer: The sole intention of this story is education. The opinions and suggestions expressed above are not those of easyniftytrading.com, but rather those of individual analysts or broking firms. Before making any financial decisions, we encourage investors to consult with qualified professionals.