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What is Mutual Fund Lock-in Period & How it Works?

what is lock in period in mutual fund and how does it works

One of the most feasible investment options for all income groups is mutual funds, which offer attractive returns and come with a lock-in period. A mutual fund lock-in period is the time period during which investors are required to hold onto their investments without selling or redeeming them.

However, understanding the lock-in period is essential for investors since it will affect the liquidity, returns, and investment planning. In this article, we will focus on the meaning of a lock-in period in mutual funds, its importance, benefits, and how to check the lock in period of a mutual fund in detail.

What is the Lock-in Period in Mutual Funds?

The lock-in period in mutual funds refers to the minimum period during which investors cannot redeem or sell their investments. This period may vary depending on the type of mutual fund schemes you choose.

Generally, close-ended mutual funds have a lock-up period of 3 years. On the other hand, ELSS is the only open-ended fund with a lock-up period, which applies to both SIP and lump sum.

Note: You must pay an exit load to sell the other open-ended mutual funds within a year with no lock-in period.

Why is the Lock-in Period Important in Mutual Funds?

The purpose of a lock-in period is to stabilize a company's share price before its investors can cash out. Here is the importance of the lock-in period:

1. Restricts Trading

A mutual fund's lock-in period is essential to restrict investors' urge to trade the units. By sticking with it for a longer period, investors obtain maximum benefits from investing in mutual funds.

2. Stabilises Fund Performance

Stabilizing mutual funds is also crucial. Otherwise, frequent modification in the units or fund size may affect returns. This may also lead to liquidity issues due to imprudent selling within a short time.

3. Encourages Long-Term Investment

The lock-in period promotes long-term investment because it motivates the investor to hold onto the investment for a longer period and prevents short-term fluctuations from influencing investment decisions.

4. Lock-In Period

This is crucial for money put in through investors' schemes, like ELSS, to remain eligible for section 80C tax advantages so that the tax benefits do not end too soon. Always plan your investment timeline to increase tax benefits and returns.

5. Reduces Market Timing Behaviour

Lock-in reduces the likelihood of market timing as investors cannot attempt to time their investments; instead, they look to the long-term growth of investments and do not react to short-term volatility.

6. Investor Discipline Improvements

Investors will be more likely to stay on course in their financial objectives, as they know that their money is invested for a certain time. Hence, they will be more disciplined about investments, reducing emotional decisions.

7. Ensures Fund Liquidity Management

This provides the fund management with a lock-in period that manages the cash flows appropriately and brings about fewer sell-offs of existing assets at untimely redemption calls that disturb fund stability.

8. Facilitates Growth of Funds

A lock-in period gives the fund uninterrupted growth since the capital is invested more extended, allowing return compounding and helping long-term investors. It encourages patience and discipline.

Lock-in Periods in Different Types of Mutual Funds

Different mutual funds have different lock-in periods. Here are the periods and tax implications for each type of mutual fund:

Mutual Funds	Lock-in Periods
Equity Funds	Equity funds have a lock-in period of 3 years. The time is calculated from the date of purchase.
Debt Funds	No lock-in period.
Hybrid Funds	No lock-in period.

Benefits of Lock-in Period in Mutual Funds

The lock-in period is beneficial for investors as well as the funds. Below are some of those benefits:

It helps investors hold their investments for longer to gain long-term benefits.
Many investors withdraw their investments out of panic on minor market flickery. The lock-in period in mutual funds restricts this and keeps the fund intact and stable.
It generates stability in the funds and conserves stability. It is essential if you are investing to achieve some financial goals.
Investors can learn about market changes by sticking up with their investments for a long time.

How to Check the Lock-in Period of a Mutual Fund?

Checking the lock-in period is important for your financial plans. To check the lock-in period of a mutual fund, you can do the following steps:

Step 1

Access the "Overview" page of the specific scheme on your online investment platform

Step 2

Locate a "Scheme Snapshot" section that displays the lock-in period, if any.

Step 3

Alternatively, you can refer to the Scheme Information Document (SID) or Key Information Memorandum (KIM) of the mutual fund to find this detail.

What is the Lock-in Period for Other Tax Saving Schemes?

The lock-in periods for all tax saving schemes are not the same; they vary. Here's a breakdown of it:

Scheme Type	Lock in Period
Fixed Deposit	Fixed Deposits have tax deductions under section 80C of the Indian Income Tax Act, 1961. You can claim a deduction of a maximum of Rs.1.5 lakh by investing. There is a lock-in period of 5 years for such FDs, and the interest earned is taxable. The rate of interest usually ranges from 5.5% - 7.75%.
PPF (Public Provident Scheme)	PPF comes with a fixed 15-year lock-in period. A long-term savings cum investment product, you need to open a PPF account at the post office. Contributions to the PPF account earn a guaranteed interest. You can claim deductions up to Rs 1.5 lakh in a financial year.
Senior Citizen Savings Scheme	The Senior Citizen Savings Scheme (SCSS) has a lock-in period of five years, but it can be extended for an additional three years. The principal amount deposited in an SCSS account is eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to the limit of Rs. 1.5 Lakh.
Life insurance	Life insurance, be it traditional (endowment) or market-linked (ULIP), offers tax benefits to policyholders on the premiums paid. Premiums paid towards life insurance are covered under Section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakhs. Proceeds on death/maturity are tax-free under Section 10(D).
Pension plans	The lock-in is for a few years. The aggregate limit of deduction under all the subsections of Section 80C cannot exceed Rs 1.5 lakhs. On maturity, 1/3rd of the accumulated pension amount is tax-free, with the balance of 2/3rd treated as income and taxed at the marginal tax rate. The amount is tax-free upon death.
Health insurance or Mediclaim	Insurance premiums up to Rs 20,000 for senior citizens and Rs 15,000 for others are eligible for tax benefits. If the policyholder pays Rs 15,000 as a premium and Rs 20,000 for his parent, a senior citizen, he can claim a tax benefit of Rs 35,000 (Rs 15,000+20,000). The maturity value is tax-free.
NPS	The NPS is highly cost-effective since fund management charges are low. The fund managers manage the money in three separate accounts with distinct asset profiles. For tier 1, the lock-in period is when the investor turns 60 years old. The aggregate limit of deduction under this section cannot exceed Rs 1.5 lakhs.
ELSS	Investments in tax-saving mutual funds, also known as equity-linked savings schemes (ELSS), qualify for tax benefits. Investments are locked in for three years. Investments towards tax-saving mutual funds are up to a maximum of Rs 1.5 lakhs. Proceeds on death/maturity are tax-free.

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What to do After the Expiry of the Mutual Funds Lock-in Period?

As an investor, you must wait to redeem your units after the lock-in period expires. Before deciding whether to redeem, a thorough review is important.

1. Evaluate the Investment Performance

Once the period of 3 years is over, you must review your investments. For example, ELSS funds offer both tax benefits and long-term capital appreciation. However, most investors mistake using it just as a tax-saving tool. Therefore, they transfer the money to invest in another ELSS fund.

These multi-cap funds invest in equity, which only grows to the fullest within 3 years. You must stay invested in the fund for at least 5 to 7 years for maximum realization of returns.

2. Decide Whether to Stay Invested or Not

You can continue your investment as an open-ended fund after the expiry of the lock-in period of mutual funds. Besides, you can transfer the money to any other scheme that matches your investment objectives.

However, if the fund's performance aligns with your investment objectives, you must continue. If the performance review does not align with your goals, it is better to redeem and invest newly.

3. Redeem the Units of Your Investment

You must not consider the lock-in period as your investment tenure and exit the fund after it ends. Redeeming only for genuine requirements, such as a medical emergency, is wise.

As the fund becomes open-ended, you have the option to redeem the units as a whole or in a lump sum. Therefore, you can redeem only a portion of your investment instead of completely exiting it.

What to Avoid Once Your Mutual Fund Lock-in Period Expires?

Once the lock-in period of your mutual fund has passed, it is time to make intelligent decisions. This will help you get most returns from your investments and to achieve your financial goals. The following are a few things to avoid:

1. Panic Selling

Avoid making impulsive decisions based on short-term market movements. Before deciding to sell, consider the market's condition and your long-term goals. The potential impacts on your investment strategy. Stay patient and focus on your broader objectives.

2. Withdrawing Prematurely

Do not liquidate the investment based on the end of the lock-in period. Check whether the fund aligns with your investment objectives and whether it is time to exit. A premature withdrawal can derail your long-term strategy.

3. Overlooking Tax Consequences

In particular, be aware of tax liabilities for long-term capital gains. Liquidating after the lock-in period may attract tax implications. This will be reflected in your returns. Factor these into your decision to ensure the net benefit is worth the move.

4. Automated Reinvestment Without Goal Review

Do not continue to reinvest in the same fund without reviewing your current financial goals. Your investment plan will have to change when your circumstances do. Regular evaluations ensure your money works effectively for you.

5. Ignoring Fund Performance and Alternatives

Avoid sticking with a mutual fund if its performance has underperformed or if better alternatives are available. Always review your investment options to ensure optimal returns. Diversifying or rebalancing can help improve your financial outcomes.

6. Not Considering Your Liquidity Needs

If you need liquidity, do not invest large sums of money in funds that are difficult to access quickly. Think about your short-term financial needs before making decisions post-lock-in. Having access to emergency funds is crucial for financial flexibility.

So, to sum it up, the lock-in period restricts you from selling your investment to gain long-term benefits. It is not your investment tenure but a simple restriction to preserve the fund's liquidity and increase stability. Thus, you have no obligation to redeem the units after the lock-up period expires. However, you should only remain invested if their performance aligns with your financial goals.

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Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Mutual Funds Lock in Period

What is the lock-in period for mutual funds?

Most mutual funds do not have a lock-in period. It means that you can redeem your investment anytime. The only exception is Equity Linked Savings Schemes (ELSS). These mutual funds typically have a lock-in period of three years.

Can I withdraw money in a mutual fund after the lock-in period?

Yes, you can withdraw the money from a mutual fund after the lock-in period is over. You can redeem the units after completing the specified time for holding an investment.

Is it good to break a mutual fund investment before the lock in period ends?

No, withdrawing mutual fund investments before maturity attracts penalties such as exit loads. Exit loads are fees charged by mutual fund companies to discourage premature withdrawals.

Which mutual fund has a 3-year lock-in period?

An Equity-Linked Savings Scheme (ELSS) is a type of tax-saving mutual fund in India. Through this, an investor gets to save on tax deductions under Section 80C. This has the potential to generate high returns through equity investments. All ELSS funds have a mandatory 3-year lock-in period.

Can I sell mutual funds during the lock-in period?

No, you cannot sell the mutual funds during the lock-in period. This is a lock-in period where you're not allowed to redeem or sell your investment in that mutual fund. ELSS usually has a three-year lock-in period.

Is it necessary to stay investing or to redeem money even after the lock-in period has ended?

No, it is not necessary to redeem your money immediately after the lock-in period ends. You can continue investing in the fund if its performance aligns with your financial goals. You can do so even after the lock-in period expires.

What is the minimum lock-in period for mutual funds?

The least lock-in period in mutual funds, which applies to Equity Linked Savings Schemes (ELSS), is three years. You cannot redeem your ELSS units before completing the three years.

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

To check the lock-in period of a mutual fund, access the "Scheme Snapshot" section on the overview page of the mutual fund scheme. This is on your online investment platform. Find the lock-in period displayed there. Also, find this information in the Scheme Information Document (SID) or the Key Information Memorandum (KIM) of the scheme.

What to avoid if your lock-in period in a mutual fund expires?

When your mutual fund lock-in period expires, avoid immediately withdrawing your money. First, test the fund's performance. This includes not reinvesting in a new fund only for tax benefits. You might miss out on better growth potential by not considering all options.

Is there any lock-in period for sip?

No, a regular SIP (Systematic Investment Plan) itself does not have a lock-in period. You can stop your SIP anytime. If you invest in an ELSS fund through SIP, each installment will have a 3-year lock-in period from its investment date.

Do all mutual funds have a lock-in period?

In India, most mutual funds do not have a lock-in period. Generally, all the close-ended funds and ELSS have a lock-up period.

Which mutual fund has no lock-in period?

Open-ended funds, such as Liquid funds and hybrid funds, don't have any lock-in period. But, it's recommended to check the mutual fund scheme before investing.