Should you redeem your ELSS investment after the three-year lock-in period?

Pushpa is 35 years old and teaches in a school. Her husband is a government official. Both of them have been saving regularly for their retirement and their children’s higher education. While her husband prefers the stability of fixed returns and, thus, primarily invests in fixed deposits and the PPF, Pushpa has opted for equity-linked tax-saving schemes of mutual funds.

Impressed by their performance, she has invested in a few equity-linked saving schemes ( ELSS) as well, primarily to save tax. Her investments will soon be completing the threeyear lock-in period. She plans to redeem these investments as soon as the lock-in period ends. Will she be taking the right decision?



Investors like Pushpa typically look at equitylinked saving schemes as a three-year investment. However, this might not be the right approach. ELSS funds are managed in a manner similar to other diversified equity mutual funds with a long-term investment outlook. Therefore, Pushpa must realise that an ideal investment horizon may be longer than the three-year lock-in period. She could choose to keep the funds invested if the fund is performing well and there is no pressing need for redemption.

Moreover, being an equity investment, ELSS balances the otherwise fixed income-heavy investment portfolio. This provides capital appreciation, which is much needed for long-term goals. Over the long term, the couple’s portfolio is likely to gain due to the obvious benefits of diversification. Instead of viewing it as a tax-saving instrument, Pushpa must consider ELSS as a growth-oriented investment avenue, which doubles as a tax-saving tool.

Therefore, she must focus on her investment goal and its attainment while contemplating the investment and redemption decision. Ultimately, it is her investment goal which should dictate the investment horizon and not the lock-in period.


(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)