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What happens after the 3-year lock-in for my ELSS ends?


I need some help in deciding a strategy for my ELSS (equity linked savings scheme) mutual funds after they have completed the three-year holding threshold. Should an investor hold on to them or redeem and reinvest the proceeds in other funds?

—Name withheld on request

ELSS funds have a lock-in only for tax purposes. As tax-saving instruments, they are intended to encourage long-term savings. ELSS funds enjoy tax benefit under section 80C of the Income Tax Act. Under this section, one can get tax deduction of up to 1.5 lakh every financial year for investments made in the scheme, among other eligible investment avenues.

However, there’s a distinction between a lock-in for the fund and how long you can hold the fund. The lock-in is simply to prevent you from redeeming your investments too early. It neither indicates that you have to redeem once the lock-in is done, nor is it like the maturity period for a fixed deposit which returns your money once the maturity date is hit.

If your ELSS investment is out of the lock-in period, all it means is that you can redeem the fund if you wish to do so. An ELSS fund is essentially an equity fund. Therefore, view your investments in ELSS funds like you would with any other equity fund in your portfolio.

As long as the fund is a good performer, continue to remain invested in the fund. If performance slips in relation to its benchmark or peers, then redeem and shift to a different fund.

Remember that for an equity fund to deliver and to smooth out volatility, they are best held for at least 4-5 years; an ELSS fund falls into the same bracket.

If the investment amount in the fund is low, you can consider exiting while consolidating your portfolio as well, to reduce the number of funds you hold.

Also note that you do not need multiple ELSS funds; as long as the fund remains a quality performer, use the same fund each year for tax savings.

Srikanth Meenakshi is co-founder at PrimeInvestor.

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