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Lock in for Equity Linked Saving Scheme (ELSS) units purchased through a Systematic Investment Plan (SIP)

This article talks about the lock-in period for ELSS MF units that have been bought using SIPs.

We know that investing in equities for the long term gives the best possible returns with minimal risks.

(Please read “Equity Investment is Risk Free – Here’s the Proof” for more)

We also know that for most people, investing in stocks through mutual funds (MFs) is better than investing directly in shares.

(Please check out “Direct investment in Stocks versus Mutual Funds (MFs)?” for more)

 

Why Equity Linked Saving Scheme (ELSS)

From the article “Equity Linked Savings Scheme (ELSS) is not for someone else”, we also know that investing in equity MFs is most beneficial through ELSS schemes, because:

  • It provides saving in income tax through Section 80C deduction
  • You get a far better tax adjusted rate of return
  • You lock-in your funds for 3 years, so you can’t give-in to the temptation to sell the units and splurge the money

 

Why Systematic Investment Plan (SIP)

The article “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” explains the benefits of an SIP in detail. However, here are the advantages in brief:

  • You reduce the average cost of acquisition of the units through cost averaging
  • You remove the element of timing the market
  • An SIP means automatic discipline – you don’t have to remember to invest every month once you start an SIP
  • You end up saving a fixed amount every month compulsorily

 

ELSS and Lock-in period

ELSS schemes of mutual funds (MFs) are one of the best methods of investing in equities, especially because they also provide income tax benefits.

However, for that very reason (income tax benefits), there is a 3 year lock-in period for ELSS investments. That is, any investment that you make in ELSS schemes can not be liquidated before 3 years.

For example, if you purchase some units in an ELSS scheme on 1 Aug 2010, you can not redeem those units before 2 Aug 2013.

 

ELSS through SIP – What is the lock in?

One question that gets asked very often is: What is the lock in period if the ELSS units are bought through a systematic investment plan (SIP)? Do the 3 years start from the first SIP installment, or from the last SIP payment?

Here’s the guiding principal: Each installment of an SIP is treated as a separate investment. This is true for calculating the lock-in for ELSS schemes, and this is also true for calculating the capital gains on MF investments made using SIP.

Thus, a simple answer is: There is a separate 3 year lock in period for EACH SIP installment.

 

Example

Let’s say you started your SIP from 1 Aug 2008, and paid the last installment on 1 Oct 2009. What would be the lock in?

The 3 year lock in for the units bought on 1 Aug 2008 would end on 1 Aug 2011, the 3 year lock in for the units bought on 1 Sep 2008 would end on 1 Sep 2011, and so on. The 3 year lock in for the units bought on 1 Oct 2009 would end on 1 Oct 2012.

You can not redeem all the units on 1 Aug 2011, nor do you have to wait till 1 Oct 2012 to redeem units purchased before 1 Oct 2009.

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