Why do we invest? Well, mostly for gaining returns, achieving financial goals and reducing tax liability. An Equity Linked Saving Scheme (ELSS) lets you enjoy all these benefits. It is an open-ended mutual fund (MF) that invests your money in equity and equity-linked securities.
Other than offering high returns, ELSS also allows you to claim tax exemption benefits under Section 80C of the Income Tax Act, 1961. You can invest in an ELSS by depositing a lump-sum amount or choosing a Systematic Investment Plan (SIP). And as with most tax-saving instruments, it comes with a compulsory lock-in period.
But you might wonder when the right time to sell ELSSis? Or should you really sell your investments when an ELSS exceeds its lock-in duration? Let’s find out in detail.
ELSS funds have the shortest lock-in period as compared to other tax-saving investment options, i.e. just three years. Thus, you cannot withdraw the amount before three years. At the end of its lock-in period, an ELSS becomes a diversified, equity-oriented scheme offering high liquidity. But, is it essential to sell off your investments after this time?
In short, No. While you can now redeem the units whenever you require, it is not mandatory to do so immediately. And you should ideally stay invested in such mutual funds if they are performing well. In fact, you must keep your investments for an extended period if you want to attain maximum returns. You will also receive compounding interest benefits with a long-term horizon.
Additional Read: What Are ELSS Funds?
The key factor is performance. You need to consider the scheme’s performance against your unique financial requirements, risk profile and goals. Your ELSS fund may start underperforming its category and benchmark. If this continues for a long period and adds to your dissatisfaction, you may proceed to sell the units.
Still, ELSS investments work well when aligned with your long-term goals. So you should retain your holdings for a lengthy duration. Then, you can consider selling your holdings a few years before reaching your goal. This is because ELSS invests in equity instruments that are slightly riskier than debt. Thus, you can switch to safer options such as debt mutual funds to avoid stock market volatilities.
Additional Read: ELSS: Wealth Creation Analysis
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