What is lock-in period in mutual funds?

Lock-in period for mutual funds

Mutual funds help investors diversify their portfolios, offering a safe investment avenue. Mutual funds invest in a variety of asset classes, such as equities, bonds, debt, and commodities. This blog post will specifically discuss the ELSS lock-in period, a feature of mutual funds.

Put simply, a lock-in indicates the period when investors cannot partially or wholly redeem their invested money. Generally, three years is the lock-in period for the close-ended funds. Most mutual funds in India don’t come with a lock-in period. Equity Linked Savings Scheme is the rare one in the category of open-ended schemes.

Lock-in period in different types of investments

Now that we have defined the lock-in period let us understand how it applies to different types of investments.

Lock-in period in mutual funds

We have seen that an investor cannot withdraw or redeem the amount invested or allocated units during the lock-in period. Closed funds typically come with a lock-in period. During the lock-in time, we call mutual funds the closed funds. ELSS funds come with a lock-in period of three years.

Lock-in period in hedge funds

Here, the funds generally have a 30-90 day period. The hedge fund manager gets sufficient time to withdraw the investments gradually.

Lock-in period in ELSS mutual funds

Three years is the lock-in period of these mutual funds, which is strictly enforced. Moreover, no provision exists to redeem funds by paying the penalty.

Lock-in period in tax-saving fixed deposits

The waiting period for tax-saving FDs is five years. Therefore, as an investor, you can redeem your money after maturity has expired.

Lock-in period in government of India bonds

The 8% government of India bonds come with a maximum six-year lock-in period.

Lock-in period in ULIP funds

ULIP or Unit Linked Insurance Plan offers the opportunity to invest in a product that is a combination of insurance and investments. The investments come with a lock-in period of five years.

Significance of the lock-in period

Here, we list specific reasons why the lock-in period is significant.

  • First of all, this feature helps protect investors. If you are a newbie investor, you might redeem your invested money in panic if the market turns volatile. It can keep your money intact for a specific period. Therefore, you will get a chance to achieve better returns by staying invested for the long term.
  • Investors will get to know the gains if they invest their money for long periods. This fixed time lets investors stick to their plan. Thus, they can learn how to keep funds invested for longer and profit from it.
  • Investors can reap the advantages of taxation for long-term capital gains.
  • If you are a hedge fund manager, you will get enough time to get out of the investment. If you redeem money suddenly or withdraw money too frequently, it can affect the balance of the entire portfolio.
  • In IPOs, the listed firm can make use of the window to use the funds raised to secure a strong position in the market. Besides, it can save the investor from volatility in post-IPO prices.
  • This period is essential to induce stability in mutual funds. Funds can face a liquidity crunch in the face of excessive redemption requests. The lock-in time helps maintain the liquidity of the fund.

How to check the lock-in period of a mutual fund?

The lock-in period of a mutual fund refers to the time frame during which the investor is not allowed to redeem or sell the units of the mutual fund scheme. The lock-in period varies from fund to fund and depends on the type of mutual fund.

  • To check the lock-in period of a mutual fund, you can follow these steps:
  • Visit the mutual fund’s website or the website of the Securities and Exchange Board of India (SEBI).
  • Look for the mutual fund scheme you are interested in and go to the scheme details page.
  • Check the section on the lock-in period. You can find mention of the lock-in period in the scheme information document (SID) or the mutual fund scheme’s key information memorandum (KIM).
  • If you cannot find the information on the website, you can contact the mutual fund company’s customer care or visit the nearest branch office to get the information.
  • It is important to check the lock-in period before investing in a mutual fund, as it can affect your liquidity and investment goals.

Conclusion

A lock-in period is, in some ways, a safety feature. It applies mostly to hedge funds, IPOs, and select mutual funds. New investors stand to benefit from the compulsory waiting period as it will teach them a thing or two about long-term investing.

FAQs

What is the minimum lock-in period of mutual fund?

Most mutual funds don’t come with a lock-in period. Closed funds have a lock-in period. ELSS mutual funds come with a lock-in period of 3 years.

Can I withdraw my mutual fund before lock-in period?

If you invest your money in an open-ended scheme, you can withdraw anytime. But if you invest in ELSS, the lock-in period is three years from the investment date.

What happens to mutual fund after the lock-in period?

Once a lock-in period expires, you must review the fund’s performance. Then, you should check out if it can beat its benchmark index.

Do all mutual funds have a lock-in period?

In most cases, these funds don’t come with a lock-in period. ELSS, or tax-saving mutual funds, are the only ones with three years of lock-in period.

Can I sell mutual funds in lock in period?

No, you generally cannot sell mutual funds during their lock-in period. The lock-in period restricts redemption, and early withdrawal may result in penalties or loss of tax benefits.

Which mutual fund has a 3 year lock in period?

Equity Linked Savings Schemes (ELSS) are the mutual funds with a 3-year lock-in period. This lock-in period encourages long-term investment and offers tax benefits to investors.

Can I withdraw my mutual fund before lock in period?

In general, you cannot withdraw a mutual fund before its lock-in period expires. For example, Equity Linked Savings Schemes (ELSS) have a mandatory 3-year lock-in period.

Can I withdraw my mutual fund after lock in period?

Yes, you can withdraw your mutual fund after the lock-in period ends. For example, in Equity Linked Savings Schemes (ELSS), you can redeem the units once the 3-year lock-in period is over.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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