What is Lock-in Period and Its Importance in Mutual Funds

One of the most feasible investment options for all income groups is mutual funds, which offer attractive returns. They accumulate funds from multiple investors and invest in a vast range of asset classes.

However, mutual funds come with some clauses that make them difficult to understand. The lock-in period is one such clause that is discussed below to make things easy for you.

What Is a Lock-in Period in Mutual Funds?

The meaning of lock-in period is you cannot redeem your units before a predetermined date from your investment. It does not indicate the investment tenure as it can be longer than this period.

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

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

Why Is Lock-in Period Important in Mutual Funds?

A mutual fund’s lock-in period is essential to restrict the urge of investors to trade the units. Investors obtain maximum benefits from investing in mutual funds by sticking for a longer period.

It is also crucial to bring stability to mutual funds. 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.

What Are the 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 a longer period to gain long-term investment benefits.
Many investors withdraw their investment out of panic on minor market flickery. The lock-in period in mutual funds restrict this and keep the fund intact and stable.
It generates stability in the funds and conserves stability.
In the case of ELSS, it helps you claim income tax deductions on your taxable income. It is eligible for a maximum tax deduction of ₹ 1,50,000 under Section 80C of the Income Tax Act.
Investors can learn about the market changes by sticking up with their investments for a long time.
It is essential if you are investing to achieve some financial goals.

What to Do After the Expiry of the Lock-in Period?

You must not redeem your units immediately after the lock-in period expires as an investor. A thorough review is important before deciding whether to redeem or not.

1. Review the Fund or 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 does not grow to the fullest within 3 years. You must stay invested in the fund for a minimum of 5 to 7 years for maximum realisation of returns.

2. Decide Whether to Stay Invested or Not

You can decide to 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, you must only continue if the fund’s performance aligns with your investment objectives. 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 is over. It is wise to redeem only in the case of genuine requirements such as a medical emergency.

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

So, to sum it up, the lock-in period restricts you from selling your investment to gain long-term investment 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.

Frequently Asked Questions

✓ 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?

Liquid funds are debt funds that do not have any lock-in period. They invest in fixed-income securities like treasury bills, certificates of deposit, and commercial papers that mature within 91 days.

✓ Which tax deduction is available on ELSS funds during a lock-up period?

You can claim a ₹ 1,50,000 tax deduction under section 80C of the IT Act for investing in ELSS funds.

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

ELSS funds come with a minimum lock-in period of 3 years.