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Money Aug 22, 2012

How you could be stuck in your mutual fund forever

By Bindisha Sarang

Security Exchange Board of India (Sebi) last week brought about some widespread reforms in Mutual Funds regulations. These reforms were brought about in order to attract investors as well as distributors to MFs. If you are someone who wants to revisit the MF space and want your investment to have rich exposure to equity as well as get a tax break, you probably must have invested in Equity Liked Saving Scheme (ELSS). But under certain circumstances, there is a possibility that your money could be stuck in the scheme forever. How so?

Check your account statement for the plan switch slip or visit the fund house website for the switching form and more details. Reuters

Locked in for three years: When you invest in ELSS, the fund locks your money for a period of three years. Under ELSS, you get three plans to choose from. The first option is growth, which works well for long term wealth creation. The second option is dividend payout which works well for those investors who want some liquidity. The third option is dividend reinvestment, and there is a good possibility that a part of your money would get locked in forever, if you choose this option.

How: In this option, whenever the scheme declares a dividend, it gets reinvested back into the fund, since this dividend reinvested amount is considered as a fresh investment, it too gets locked in for another three years. And so on. So, in a way the money gets locked in a cycle, over and over again.

Way Out: Now if you realized that you have picked the dividend reinvestment option on your ELSS, you need not worry. Just inform the fund house that you want to switch the plan. Most funds will allow you to switch to the dividend payout plan. Check your account statement for the plan switch slip or visit the fund house website for the switching form and more details.

by Bindisha Sarang

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