How do Tax Saving Mutual Funds work?

When an investor invests their money in mutual funds, the funds are added to the pool. The funds are then invested in the equity markets in such a way that even if one investment incurs losses, the other investment manage to mitigate the loss. For example, the breakup of an invest in a particular fund may look like:

• Automotive industry 6.56%
• Banks 17.56%
• Consument durables 5.34%
• Consumer non-durables 5.66%
• Power 5.92%
• Software 8.93%
• Pharmaceuticals 9.99%

This means that 6.56% of the invest will be put in the automotive industry and 17.56% in banks and so on.

ELSS schemes tend to come with a lock-in period of 3 years, which means that the investment cannot be withdrawn for till the end of that time. If the investment is being made in monthly instalments (SIP) then the lock-in period for each instalment is 3 years. For example, if the first investment was made on the 1^st of Jan 2015 and the second one on 1^st of February 2015 then on the 1^st of January 2018 ONLY the first instalments will get unlocked. The second instalment will remain locked till the 1^st of February 2018.

When it comes time to withdrawals, investors can see how many units have gotten unlocked and redeem them at the current NAV. The NAV (Net Asset Value) is the amount you will get for each unit. To make withdrawals, you will need to know the number of available units and submit a claim form to the mutual fund provider. They will credit the amount to your account as soon as it is processed.