Why does ELSS have a lock-in period?

In India the saving culture is yet to evolve. Also, with the advancement in shopping methods youngsters are busy making online purchases, thus hardly having any savings. There are several mutual fund schemes available in the market that can help you increase your wealth. These mutual fund schemes (a majority of them) come with a lock-in period. Securities and Exchange Board of India regulates lock-in periods for all types of investment funds. SEBI regulates and supervises lock-in period to protect the interest of all retail investors. A lock-in period can be something as short as 30 to 90 days and can go up to 15 years depending on which mutual fund investment scheme you choose. But what exactly does a lock-in period mean? And why does a tax saving mutual fund scheme like ELSS which is an open-ended scheme is an exception to have a lock-in period? This article will help you answer these basic questions.

Lock-in period

Basically, a lock-in period is a predetermined time frame when investors or shareholders aren’t allowed to sell or redeem their investment policy or company shares respectively. Lock-in periods play a huge role in maintaining the stability of the market. They are also responsible for stabilizing and preserving the liquidity in the market. Without a lock-in period, assets will liquidate too soon leading to unpredictability in the market.

How does ELSS have a lock-in period being an open-ended scheme?

ELSS is a tax saving scheme. Which means that an investor can claim up to Rs. 46,800 worth of tax benefits with an annual investment of up to Rs. 1.5 lakh. A lock-in period gives your initial investment a chance to grow. ELSS has a three year lock-in period. This means that you cannot redeem your ELSS gains for at least three years. This gives your ELSS fund a chance to beat market volatility and perform better in the long run. ELSS is an equity-related scheme. You must know that all equity-related schemes generally fare better when they are given a chance to perform for a longer time period. Plus, the scheme not just helps you save taxes but also gives you a chance to earn some incentives from your investment. Also, the introduction of a lock-in period helps promote the savings culture. Why spend unnecessarily when you can save and increase your chances of doubling your wealth?

Now that you are aware of what ELSS is and why it has a lock-in period, planning on some investment? If so, one of the best ELSS scheme currently available in the market is Axis Long Term Equity Growth. The fund is about to complete ten years in December 2019 and is performing considerably well in the ELSS space. So if you want to increase your chances of fetching a decent amount of returns from an ELSS investment and save tax at the same time, you should consider investing in Long Term Equity Growth fund scheme.