Equity Linked Saving Schemes (ELSS) are a popular choice for many investors as they help in creating wealth as well as provide a profitable return. Among all mutual funds, ELSS offer tax benefits under section 80C of the Income Tax Act having lock-in period of 3 years as compared to the 5 year or higher lock-in period of the other popular tax saving instruments like PPF Account, National Savings certificate, Tax Saving Fixed deposit.

Amongst all the tax savings schemes this is the only one which gives full exposure to equity. Even though ELSS has some risk involved, but with minimal lock-in period, it has emerged as the most attractive tax saving vehicle today.

What to do When ELSS Lock-in Period Ends?

ELSS is more than just a tax-saving investment. It is an equity mutual fund that is structured like any other, with the objective to generate consistent long-term returns by investing a majority of its corpus in equity shares.

ELSS mutual fund is just another mutual fund with a 3-year lock-in. And analysis shows that staying invested in it beyond the lock-in is a good investment choice. Let’s look into the various options you have when the 3 years of lock-in period of ELSS fund ends.

1. Review Performance

Many investors make the mistake of encashing the ELSS investment as soon as it completes 3 years and sometimes they use the same amount to invest in fresh ELSS in order to claim a tax benefit in that year. However, it is not a prudent strategy as your capital will not grow and achievement of future financial goals will be jeopardized. Also, there is a possibility that after the expiry of 3 years, the returns may be sub-par.

The ideal time horizon for investing in this type of mutual fund is about 5 years.

After the expiry of the lock-in period of 3 years, the investor should review the performance of the scheme and in case the scheme has performed lower than the benchmark, then the investment amount may be shifted to another open-ended Equity Fund for better returns in future.

Although if you are not very sure, you can consult your financial planner.

2. Treat it as a Multi-cap Mutual Fund Investment

ELSS is like any other equity oriented mutual fund. In terms of composition, it invests like a muti-cap fund. In most cases, these funds invest across market capitalization, with a tilt towards the stocks of the large cap category.

An analysis of returns over the last 5 or 10 years shows that ELSS performed better than pure large-cap funds on a risk-adjusted return basis. That means an ELSS can deliver a higher return with relatively lower volatility compared to large-cap funds.

There is a long-term advantage in investing in ELSS funds over and above the tax advantage you received when you first invested your money.

Fund manager of these schemes follow similar to any other open-ended diversified equity fund and they don’t distinguish it from others when it comes to stock selection strategy. ELSS have the flexibility to invest across market capitalization.

Under the new categorization guidelines, ELSS remains the same; there is no specification of market capitalization within the equity basket.

3. En-cash after Lock-in Period

Normally people should not leave just because the 3 year lock in period is over. But if the need for money arises than you can go for redeem once the lock-in period gets over. Around, 20-30% exits do happen when the lock-in gets over but that too not in one go.

Also remember, you don’t need to redeem the entire amount either. You can redeem a small portion of the total investment also.

ELSS investments should be en-cashed only when an important financial goal has arrived or there is a medical or other financial emergency in the family. Investors should keep in mind that after the initial lock-in period of 3 years, their ELSS investment becomes open-ended and investors can withdraw it in lump sum or in parts. There is no exit load as well as there is no incidence of tax.

Read More : ELSS: Which is better SIP or Lumpsum?

Is it Mandatory to Redeem After the Lock-in Period of ELSS Ends?

No it is not mandatory to take your money out of an ELSS mutual fund. If your ELSS mutual fund is performing well and is at par with your investment goals then don’t redeem it.

But if it is not meeting your investment expectations and there are better funds available in the market in the same category, then redeem and invest in better funds. 3 years is a long time, and the market may behave totally different in that span of time.

Best ELSS Mutual Funds to Invest

Here are the best ELSS funds you can invest in.

Aditya Birla Sun Life Tax Relief 96

This is an ELSS launched in March 06, 2008. It is a fund with moderately high risk and have given a return of 25.65 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  26.63 %
3 years  11.25 %
5 years  22.58 %

Here are the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹ 4759 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 200 Fund since its launch.
  • The top portfolio holdings of the fund include Sundaram Clayton Ltd., Honeywell Automation India Ltd., Gillette India Ltd., Bayer CropScience Ltd., Reliance Industries Ltd., Pfizer Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Consumer Goods ( 19.1 % ) followed by Financial Services ( 17.6 % ) and Automobile ( 14.6 % ).

  • Minimum SIP = ₹ 500
  • Equity share = 98.8 % , Debt share = 0 % and Cash = 1.2 %

  • Large Cap share= 40.5 % , Mid Cap share = 59.4 % and Small Cap share = 0.1 %

This fund is one of the best ELSS fund available in market which you can invest in with minimum SIP of ₹ 500. This also provided best returns over the years as compared to other ELSS. Associate with this fund, if you are thinking of investing in ELSS for a longer duration.

Reliance Tax Saver Fund

This is an ELSS launched in September 21, 2005. It is a fund with moderately high risk and have given a return of 15.77 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  17.48 %
3 years  6.91 %
5 years  22.56 %

Here are the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 5 star fund by Groww.
  • AUM of close to ₹ 10758 Cr. Returns tend to go low once AUM exceeds a certain amount
  • Age is nearly 12 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 100 Fund since its launch.
  • The top portfolio holdings of the fund include ICICI Bank Ltd., HDFC Bank Ltd., Larsen & Toubro Ltd., Reliance Industries Ltd., SBI, Infosys Ltd., Maruti Suzuki India Ltd., Kotak Mahindra Bank Ltd., Grasim Industries Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Industrial Manufacturing ( 10.3 % ) followed by Financial Services ( 23.9 % ) and Automobile ( 10.3 % )

  • Minimum SIP = ₹ 500
  • Equity share = 97 % , Debt share = 0.2 % and Cash = 2.8 %

  • Large Cap share= 84.9 % , Mid Cap share = 15.1 % and Small Cap share = 0 %

This fund is one of the best ELSS fund available in market which you can invest in with minimum SIP of ₹ 500. Associate with this fund, if you are thinking of investing in ELSS for a longer duration.

DSP BlackRock Tax Saver Fund

This is an ELSS launched in January 18, 2007. It is a fund with moderately high risk and have given a return of 14.58 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  15.41 %
3 years  10.99 %
5 years  20.44 %

Here’s the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 4 star fund by Groww.
  • AUM of close to ₹ 3834 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark Nifty 500 since its launch.
  • The top portfolio holdings of the fund include ICICI Bank Ltd., HDFC Bank Ltd., Larsen & Toubro Ltd., Reliance Industries Ltd., SBI, Gail (India) Ltd., Maruti Suzuki India Ltd., HPCL, Grasim Industries Ltd., ITC Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Financial Services (37%) followed by Energy (12%) and Automobile (9.4%).

  • Minimum SIP = ₹ 500
  • Equity share = 99 % , Debt share = 0 % and Cash = 1 %

  • Large Cap share= 60.1 % , Mid Cap share = 27.9 % and Small Cap share = 12 %

This fund is one of the well-performing ELSS fund available in market. Associate with this fund, if you are thinking of investing for longer duration.

IDFC Tax Advantage (ELSS) Fund

This is an ELSS launched in December 28, 2008. It is a fund with moderately high risk and have given a return of 20.95 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  30.97 %
3 years  11.89 %
5 years  21.80 %

Here’s the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 4 star fund by Groww.
  • AUM of close to ₹ 897 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 100 since its launch.
  • The top portfolio holdings of the fund include KEC International Ltd., HDFC Bank Ltd., Future Retail Ltd., ICICI Bank Ltd., Minda Industries Ltd., Maruti Suzuki India Ltd., VRL Logistics Ltd., CBLO (CCIL) etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Financial Services ( 24.3 %) followed by Consumer Goods ( 13.7 %) and Automobile ( 11.4 % ).

  • Minimum SIP = ₹ 500
  • Equity share = 93.7 % , Debt share = 0 % and Cash = 6.3 %

  • Large Cap share= 48.4 % , Mid Cap share = 36.9 % and Small Cap share = 14.6 %

Launched in 2008, IDFC Tax Advantage Fund, is a ELSS fund which has consistently outperformed its benchmark since its inception and has provided best returns over the years among ELSS funds.

What is ELSS?

ELSS is a category of mutual fund that the government created to encourage long-term investing in equity. In order to do improve equity participation, the government allowed investment in equity-based mutual funds to be tax deductible through ELSS schemes.

By offering a tax deduction, the average citizen is encouraged to invest a larger part of their savings in equities. Investing in an ELSS can benefit an investor in multiple ways.

Read More : 15 Things to Know About ELSS Funds

It also provides an opportunity for long-term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high returns.

Key Features of an ELSS Mutual Fund

  • Surrogate route to direct stock markets
  • Tax saving instrument
  • 3 year lock-in period
  • Can be held even after the completion of three years
  • Offers dividend as well as growth options.
  • Lower minimum investment option.
  • One can invest in small amounts through SIP
  • Potential to deliver higher returns on investment.

One of the key sections under which individuals can save tax is the Section 80c of the Indian Income Tax Act. Under this section, investments up to ₹ 1,50,000 per annum are eligible for deduction from your taxable income.

The investment made will give you tax benefits only for that financial year. If you invest ₹ 1.5 lakh in the financial year 2018-2019, you will get tax benefits in the financial year 2018-2019. The money invested that year will continue to remain locked-in for 3 years from the date of investment. Investing more than ₹1. 5 lakhs in 2018-2019 will not give you any benefits in the next financial year.

The lock-in period of ELSS mutual funds which are allowed to be claimed as a deduction under Section 80C is 3 years. In other words, these mutual funds cannot be sold before 3 years.

If you are investing in ELSS through SIP, each instalment can be redeemed after 3 years in the similar fashion. For example: Say you bought units of ELSS mutual fund in January 2017 then it can be sold only after January 2020, not before that.

Conclusion

ELSS are an excellent way to grow your money and save tax at the same time. Like any other equity mutual fund, the best way to invest in ELSS is through the SIP mode. You should plan ahead and spread your investments throughout the year to reduce the risk of entering the market at a wrong time.

Primary purpose of every ELSS investment should be to achieve a future financial goal or to create long term wealth for distant goals like retirement planning etc. and tax saving in the year of investment should be an incidental benefit or a secondary objective.

One should actively consider allocating regularly to ELSS funds. You may even choose to invest large amounts, above your tax deduction limit, but be mindful that your investment will not be accessible, and to that extent unchangeable, for the first 3 years of lock-in. Also keep in mind, allocation to equity is most efficient over a period of more than 7-10 years.

Things to Remember

Don’t just run for returns from investment for investing in mutual funds. There are a lot of factors you should look into before selecting a fund which will match your investment goals.

Following the 3 things you should always remember before investing in Mutual Funds :

  • Higher rates: don’t blindly invest in the fund with the highest returns. Invest based on the duration you want to invest for.
  • Every person’s financial condition is different. Evaluate the funds you invest in yourself – don’t invest in a fund because of its popularity.
  • Review your investment from time to time but not too often. Once a few weeks is good enough.

Read More: 10 Tips on investing in Mutual Funds

To ensure that the fund is in good hands, choose a fund house having fund manager with good amount of experience managing small/mid cap funds and associated with these funds for some good numbers of years.

To look at some of the best performing funds from every category of mutual funds, check out Groww 30 best mutual funds to invest in 2018.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.