The lock-in period in mutual funds is the minimum duration for which investors must hold their investment, during which they cannot redeem or sell their mutual fund units. This period can vary depending on the type of mutual fund scheme.
EXPLORE FUNDS
What is Lock in period in Mutual Funds
EXPLORE FUNDS
4 mins
18-July-2024
A lock-in period in mutual funds refers to the duration during which investors cannot redeem or sell their investments. This period can vary, lasting from several months to a few years.
Closed-ended mutual funds usually come with a lock-in period, whereas open-ended mutual funds generally offer more flexibility and may not have such restrictions. For instance, Equity Linked Savings Scheme (ELSS) funds come with a three-year lock-in period, while Unit Linked Insurance Plans (ULIPs) often have a longer lock-in period of five years.
In this blog, we will cover the meaning and importance of lock-in periods, explore the durations for different mutual funds, and discuss what to do after the lock-in period ends.
What is a lock-in period?
A lock-in period is a specific duration during which an investment, usually in financial instruments like mutual funds or fixed deposits, cannot be redeemed, withdrawn, or sold. Investors are obligated to keep their money invested for the entire lock-in period, and they cannot access the funds until this period expires. The purpose of a lock-in period varies depending on the investment type but can serve to ensure commitment, discourage short-term trading, and promote long-term investing. Once the lock-in period ends, investors gain the freedom to make withdrawals or exit their investments without penalties or restrictions.
Different mutual fund lock in periods
Mutual Fund Type | Lock-in Period | Tax Implications |
Equity Mutual Funds | Equity Linked Savings Scheme (ELSS) - 3 years | Investments in ELSS funds are eligible for tax exemption under Section 80C of the Income Tax Act, up to Rs. 1,50,000 annually. However, they are subject to taxation. Short-Term Capital Gains Tax (STCG) of 15% applies if the holding period is less than one year, while Long-Term Capital Gains Tax (LTCG) of 10% is imposed on gains exceeding Rs. 1,00,000 for holdings exceeding one year. |
Debt Funds | No lock-in period | Debt funds encompass various types, totaling 16 within this category. However, they do not feature any lock-in period. |
Hybrid Funds | No lock-in period | Similar to other fund types, hybrid funds do not have any lock-in period. |
What is the Lock-In Period in Different Types of Investments?
- Mutual Funds: Typically, close-ended mutual funds come with a 3-year lock-up period. In contrast, ELSS Funds (tax-saving investments underSection 80Cof the Income Tax Act, 1961) are the sole open-ended fund that imposes a lock-up period, applicable to both SIP and lump-sum investments. This tenure is shorter compared to other tax-saving investments, making ELSS a popular choice for tax planning.
- Tax-Saving Fixed Deposits: Tax-saving fixed deposits usually come with a lock-in period of five years. Investors cannot withdraw the invested amount during this period without incurring penalties.
- Government Bonds: The lock-in period for government bondsvaries depending on the type of bond. For instance, National Savings Certificate (NSC) has a lock-in period of five years, while Public Provident Fund (PPF) has a lock-in period of 15 years.
- ULIP Funds: Unit Linked Insurance Plans (ULIPs) typically have a lock-in period of five years. This restriction ensures that investors stay invested for a reasonable duration to benefit from market-linked returns.
Why is Lock-In Period Important?
Lock-in periods serve several important purposes:
- Encouraging Long-Term Investing: Lock-in periods discourage impulsive decisions and promote a long-term investment approach. This can help investors accumulate wealth over time.
- Tax Benefits: In the case of ELSS and certain other tax-saving investments, the lock-in period is essential for claiming tax deductions under Section 80C of the Income Tax Act.
- Stability: For fund managers, knowing that investors are locked in for a specific period allows them to manage the fund's assets more efficiently.
What is Lock-In Period in ELSS Mutual Funds?
ELSS mutual funds have a lock-in period of three years, which is the shortest among tax-saving investment options in India. This lock-in period ensures that investors remain invested in equities for a reasonable duration, potentially reaping the benefits of market growth.
You can invest in ELSS funds on Bajaj Finserv platform and save tax on up to 1.5 Lakh rupees under section 80C.
Method of Investing in ELSS Funds
SIP (Systematic Investment Plan)
- Risk Mitigation and Discipline:SIP is a preferred mode for investors seeking risk mitigation and financial discipline. By spreading investments over regular intervals, it minimises the impact of market volatility. This systematic approach helps navigate market fluctuations without the need for precise market timing.
- Rupee Cost Averaging: SIP incorporates the concept of rupee cost averaging, allowing investors to buy moremutual fund units when prices are lower and fewer units when prices are higher. Over time, this strategy helps in achieving a lower average cost per unit, potentially maximizing returns in the long run.
- Affordability and Accessibility: SIP offers affordability, allowing investors to start with small amounts regularly. It enhances accessibility for a broader investor base, including those with limited funds. This makes SIP an inclusive investment option suitable for various income brackets.
Lumpsum
- Market Timing and Capital Deployment:Lumpsum investment is ideal for investors who believe in market timing or have a significant sum available for deployment. It allows capital to be deployed at once, capturing potential market upswings and optimising returns, especially during favorable market conditions.
- Potential for Higher Returns: Lumpsum investments carry the potential for higher returns, particularly in bullish market phases. Since the entire amount is invested upfront, any subsequent market appreciation directly impacts the overall investment, leading to the possibility of capitalizing on market upturns.
- Suitable for Specific Goals: Lumpsum investments are well-suited for specific financial goals or scenarios where a substantial amount is needed upfront. This could include goals such as buying a home, funding education, or other one-time financial requirements.
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Frequently Asked Questions
What is the lock-in period for mutual funds?
The lock-in period for mutual funds refers to the duration during which investors cannot redeem or sell their investments. For example, Equity Linked Savings Schemes (ELSS) have a lock-in period of three years. This period is intended to encourage long-term investment.
Do all mutual funds have a lock-in period?
No, not all mutual funds have a lock-in period. Only certain types, like ELSS, have mandatory lock-in periods. Most other mutual funds, such as open-ended funds, allow investors to redeem their investments at any time, although exit loads might apply.
Why is a lock-in period imposed on ELSS?
ELSS funds have a lock-in period to promote long-term investment in equities. This encourages investors to stay committed and benefit from potential market growth over time. It also makes investors eligible for a tax rebate under Section 80C of the Income Tax Act.
What is the tax rebate that is available on ELSS funds during the lock-in period?
Investing in ELSS funds offers tax benefits. During the lock-in period of 3 years, investors can claim a tax deduction of up to Rs. 1.5 lakh under Section 80C, reducing their taxable income and potentially lowering their tax liability.
What is the 3-year lock-in period?
The 3-year lock-in period applies specifically to Equity Linked Saving Schemes (ELSS) - a type of tax-saving mutual fund. It restricts redeeming your investment within the first 3 years from purchase.
How do you calculate the lock-in period?
The lock-in period typically starts from the date of investment for each purchase. If you invest in ELSS through a Systematic Investment Plan (SIP), each SIP instalment will have its own 3-year lock-in period starting from its investment date.
Can I withdraw my mutual fund after the lock-in period?
Yes, once the lock-in period for a specific investment or SIP instalment ends, you can typically redeem your mutual fund units without penalty. This applies to all mutual funds, not just ELSS.
Is there a lock-in period for SIP?
No, an SIP itself don't have a lock-in period. You can stop an SIP anytime. However, if the SIP invests in an ELSS fund, the individual SIP instalments will have a 3-year lock-in period from their respective investment dates.
Can I cancel an SIP with a lock-in period?
You can usually cancel an SIP at any time, regardless of the underlying investment. However, the ELSS fund units already purchased through the SIP will still be locked in for 3 years from their purchase date.
What is the 6-month lock-in period?
There is no general 6-month lock-in period for most mutual funds. ELSS has the most common lock-in period at 3 years. Some close-ended funds may have lock-in periods, but these can vary depending on the specific fund.
How to unlock mutual funds?
Mutual funds with no lock-in period can be redeemed directly through your investment platform. For funds with a lock-in period, like ELSS, you'll need to wait until the lock-in period ends for that specific investment or SIP instalment before you can redeem.
Can I withdraw my mutual fund before lock-in period?
No, you cannot withdraw your mutual fund investment before the lock-in period ends. For funds with a lock-in period, such as ELSS, early withdrawal is not permitted. After the lock-in period, you can redeem your investment without restrictions.
Can I break a lock in mutual fund?
No, breaking a lock-in mutual fund before the end of the lock-in period is not possible. You must wait until the lock-in period expires to redeem or sell your investment. This is enforced to encourage long-term investment discipline.
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