What is Lock-in Period in Mutual Funds?

What is the meaning of lock-in period? zoom-icon

Mutual Funds Sahi Hai?

There are a few type of mutual funds that impose a ‘lock-in period’ on your investment. These include equity-linked savings schemes (ELSS), Fixed Maturity Plans (FMP) in debt funds and closed ended mutual funds. A lock-in period refers to the minimum duration for which investors must hold their investment. Investors cannot redeem or sell mutual fund units in that period.   

Lock-in periods can vary depending on the type of mutual fund scheme. For instance, Equity Linked Savings Schemes (ELSS) are a tax-saver mutual fund with a lock-in period of three years. That means you cannot sell or redeem their units before the completion of three years from the date of investment. Similarly, certain closed-ended mutual funds may have a lock-in period specified in the scheme’s offer document. Besides, returns generated from investments owned for over three years are categorized as Long-Term Capital Gains (LTCG). The tax rate for LTCG is less than the rate applied to regular income (dependent on the individual's taxable earnings). Hence, lock-in period for more than three years may prove to be beneficial.

However, most open-ended mutual funds do not have a lock-in period. You can buy and sell their units at any time.

For fixed maturity plans in debt funds, you need to hold onto your investment until the lock-in period, which is for a fixed term. After that period, you can redeem your units. The lock-in is not for tax planning but to realize the yield on the underlying debt assets, which should be held until maturity. 

Lock-in periods are usually implemented to discourage short-term trading and speculation. It helps you develop the habit of investing for the long term. 

Importance of Lock-In Period

1.    Encourages you to stay invested for long-term
2.    Prevents impulsive exits during market fall
3.    Allows fund managers to focus on performance
4.    Minimizes volatility in returns

Depending on the type of fund after the lock-in period, instead of selling your investment immediately, evaluate it. If it’s meeting your expectations, you can choose to hold on to it or even invest further.

By aligning mutual fund schemes with your long-term financial goals and adopting a disciplined approach, you can leverage the power of compounding to achieve them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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