Unlocking Your Money: Mutual Funds Offer Flexibility, Not Lockups

Lock in period for mutual funds
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While investing or saving money, a common concern that investors have is that their money may be locked up for long periods. That’s where liquid investment avenues such as mutual funds come in.

Mutual funds offer convenience and flexibility to investors. Most funds do not have a lock-in period, though some may charge a minimal exit load for redeeming units before a certain period (typically a year at most).

Let’s take a closer look at how mutual funds offer liquidity and flexibility and debunk some myths around the lock-in period for mutual funds.

  • Table of contents
  1. Understanding mutual fund lockups
  2. Exit loads
  3. Misconceptions about mutual funds lockups or lock-in period
  4. FAQs

Understanding Mutual Fund Lockups

A ‘lockup’ or a lock-in period for mutual funds is a specified duration during which investors are not allowed to withdraw their funds. Most open-ended mutual fund schemes do not have a lock-in period.

Close-ended funds need to be held until maturity. Investors can only buy units during the New Fund Offer period and can redeem them when the scheme matures.

Equity Linked Savings Schemes (ELSS) are open-ended mutual funds that typically have a lock-in period of three years. These funds offer tax benefits to investors under Section 80C of the old Income Tax regime. The ELSS lock-in period is comparatively lower than that of other tax-deductible schemes under Section 80C.

Exit Loads

Other than lock-in periods, some mutual fund schemes may charge an exit load, which is a penalty of sorts for withdrawals before a specific period. This period can range from a few days to a year. The exit load is usually about 1-2% of the Net Asset Value or NAV of the redeemed units.

These exit loads are levied to discourage investors from exiting the scheme too early. This gives fund managers time to implement their investment strategies and give better return potential to investors.

Misconceptions about Mutual Fund Lockups or Lock-in Period

Contrary to popular belief, the lock-in period for mutual funds does not completely restrict access to your funds. Most mutual funds allow some degree of liquidity even during the lock-in period. For example, close-ended mutual funds can be sold in the open market before maturity.

Moreover, the exit loads on funds, when applicable, are relatively low. So, if investors need funds, they can withdraw them after paying a small penalty.

Additionally, many mutual funds do not carry an exit load – or levy one only on withdrawals within a week or two – because they are designed to be highly liquid. This includes short-term debt funds such as overnight funds and money market funds. So, investors who do not want any restrictions on withdrawal can choose such schemes.

Equity mutual funds generally charge an exit load in the first year. This is meant to safeguard investor interests because equity tends to be best suited to long-term investments.

Conclusion
The flexibility of mutual funds makes them an appealing option for many investors. The lock-in period for mutual funds is often misunderstood as a limitation. In reality, it can potentially enhance investment outcomes and encourage long-term investing. Understanding this can help investors make more informed choices and leverage mutual funds effectively for their financial goals.

FAQs

What is the typical redemption process for mutual funds?
The typical redemption process involves submitting a request to sell your mutual fund units. The units are usually sold at the current NAV, and the funds are credited to your account within a few days, depending on the type of mutual fund.

Some mutual funds charge an exit load for withdrawals before a certain period, such as a year.
Open-ended equity, bond and hybrid mutual funds are usually liquid as units can be bought or sold on any business day based on the day-end NAV. Equity funds, except ELSS funds, generally offer high liquidity. Long-term bond funds may be relatively less liquid than short-term ones. Hybrid funds are also quite liquid, though they may have a nominal exit load for the first year. Close-ended mutual funds are locked in till maturity but can be redeemed if needed by selling units in the open market, provided the liquidity is available.

Is there a penalty for early withdrawal from mutual funds?
Some mutual funds charge an exit load for withdrawals before a certain period, such as a year.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.