What is lock in period in Mutual Funds - Complete Information

If an investor leaves a generic open-ended scheme within a year, they might be charged a modest exit load. Beyond this initial period, no fees are imposed upon exit or redemption.

Lock-in times for various investment types

1. The average duration for holding ELSS mutual funds is three years.
2.  Fixed Deposits with tax savings have a five-year lock-in period.
3.  The 8% Government of India bond investment has a six-year lock-up period.
4. The minimum lock-in time for ULIPs is five years.
5. Hedge funds typically have a holding period of 30 to 90 days.
6. Public Provident Fund investors typically hold onto their money for a period of 15 years.

Why is lock-in period important?

Some of the reasons why lock-in period is important are given below:

1. In order for investors to benefit from long-term financial gain, lock-in periods are implemented to incentivize them to remain invested.
2.  Lock-in periods are a feature of mutual funds that help to maintain liquidity while fostering stability within the fund.
3.  When looking to deduct income taxes from assets, lock-in periods can be advantageous.
4.  When it comes to hedge funds, the lock-up period gives fund managers the time they need to sell fewer liquid assets or gradually realign their investment portfolios.
5. The lock-in phase is critical for startups and firms who are going public through an IPO because it helps them build a strong business plan and shows that they can withstand market fluctuations. The instant sale of stock during the post-IPO lock-up period is prohibited since share values may be highly volatile and artificially inflated.
6.  Putting in place a lock-in period for investments based on goals is a wise move.

What should be done after your Lock-in Period Expires?

Typically, closed-ended mutual funds come with lock-in periods. When the lock-in period for your mutual fund scheme comes to an end, you should ideally assess and evaluate the performance of your scheme.

If the performance of your fund is lower than the benchmark rate, then you can choose to transfer your money to an open-ended mutual fund. This will help you gain higher returns efficiently. You will need to take note that when your fund's lock-in period gets over, your returns can start to be negative or below average.

What should be Avoided when your Mutual Fund lock-in Period Expires?

If you have a lock-in period for your mutual fund, such as an equity-linked savings scheme (ELSS), and when it expires, you should avoid encashing it instantly. There are many investors who tend to withdraw the money from the plan right after completing a lock-in period of 3 years.

There are also some who use the same money to invest in a brand new ELSS particularly for claiming tax benefits. However, this can be a big mistake as this new investment may not result in good growth. Moreover, you may not be able to attain your other financial goals too.

When should you Encash your Mutual Funds?

Even when the lock-in period of your closed-ended mutual fund expires, you should try to stay away from encashing it. You need to keep in mind that once the lock-in period of your ELSS or any other scheme expires, the fund becomes an open-ended scheme.

Once this happens, you can withdraw money from your scheme at any point of time. You also do not have to pay any exit load or any tax for such withdrawals. You should typically withdraw money from your ELSS only for important financial requirements such as emergencies.

Need for Lock-In Period

During the lock-in period, the investor is barred from withdrawing or selling the units accumulated. It is done so to ensure the units are not subject to frequent modification which has the potential to disturb the equilibrium. Another supporting reason for the lock-in period is due to prevailing Income Tax laws where you can only claim deductions in the income on mutual funds that come with a certain lock-in period. During this period, the monies remains invested in the market giving it sufficient time to reap returns.

Since there are so many options available in the market today, it's paramount to make a detailed study on the product portfolio and performance of the fund before signing up. The safest bet would be to put money in a fund which has a combined exposure in debt and equity market. Further details on products can be obtained from the Mutual Funds section of this website.

When you retain your mutual fund without redeeming it before completing one year, taxes will not be imposed on your fund plan. With the help of a lock-in period, an investor can enjoy long-term capital gains. However, he or she will not have the flexibility to withdraw funds from his or her scheme for emergency purposes.

Mutual fund houses fix a particular lock-in period to retain their customers for a long period and to restrict them from selling or redeeming their funds too quickly. Lock-in periods are implemented in certain mutual fund products chiefly to confine investors from liquidating their funds very soon.