The liquidity of mutual funds is one of several features that make them accessible, convenient and widely used among investors. However, not all schemes are highly liquid. A select few mutual fund categories have a lock-in period – a specified tenure during which the investment cannot be redeemed – and understanding this aspect can help investors identify the scheme type that is suitable for their needs.
However, while it may appear restrictive at first glance, a lock-in period may serve an important purpose by promoting disciplined investing and allowing sufficient time for the investment strategy to play out.
As you venture into the world of investing, learning about mutual fund lock-in periods can help investors avoid hasty exits and unintentional penalties. Investors may also miss out on potential tax benefits in the case of ELSS funds if the lock-in period is not adhered to.
By the end of this guide, you’ll be clear about how lock-in periods work, what to do once they end, and how to spot them in your chosen scheme.
Table of contents
- What is a lock-in period?
- Different types of mutual fund lock-in periods
- What is the lock-in period in different types of investments?
- Why is lock-in period in mutual funds important?
- What is lock-in period in ELSS mutual funds?
- Benefits of lock-in period
- What to do after the expiry of the lock-in period?
- How to check the lock-in period of a mutual fund?
What is a lock-in period?
To understand this better, let’s start with the fundamentals – what is a lock-in period?
Simply put, a lock-in period is the minimum time frame during which you cannot redeem, transfer, or withdraw your investment.
- It applies to several financial products, including fixed deposits, life insurance policies, and certain categories of mutual funds.
- The idea behind a lock-in period is generally to discourage premature withdrawals that may undermine the investment’s objective or strategy and hamper specific policy objectives.
In the context of mutual funds, a lock-in period is put in place either to promote long-term holding (for example, in ELSS funds) or to cushion investors and the fund from market disruptions caused by frequent redemptions.
Different types of mutual fund lock-in periods
Although most mutual funds are open-ended with no liquidity restrictions, certain categories either have a lock-in one: period or only permit investments and redemptions during specified periods.
ELSS (Equity Linked Savings Scheme)
- Features a mandatory 3-year lock-in period.
- Offers tax benefits under Section 80C of the Income Tax Act, 1961 (applicable only under the old regime) up to Rs 1.5 lakh in a financial year.
Close-ended schemes
- Close-ended mutual funds generally do not allow redemption before maturity. Units of these fund can typically be purchased during the New Fund Offer period.
- If the investor needs funds before maturity, the units may be sold on the stock exchange, subject to liquidity and prevailing market price.
Interval funds
- These funds allow redemptions only during specified intervals.
- Investments remain locked in until the next redemption window opens, with a minimum 15-day gap between intervals.
These two are listed on the stock exchange .
What is the lock-in period in different types of investments?
Lock-ins are not just limited to mutual funds. Here’s a quick comparison across investment types:
| Investment type | Common lock-in period |
| Fixed deposits | Varies from a few months to several years, based on the deposit tenure chosen. However, early withdrawal may lead to a penalty. |
| Public provident fund (PPF) | 15-year maturity, with partial withdrawal permitted from the 5th financial year, subject to scheme rules. |
| ULIPs (unit linked insurance plans) | 5-year lock-in. Withdrawals before this period are generally not permitted, and discontinuation charges may apply in case of early exit. |
| ELSS mutual funds | 3 years from the date of investment (each SIP installment is locked individually for 3 years). |
| Retirement mutual funds | 5 years from the date of investment or until retirement age is reached, whichever is first. |
| Children’s mutual fund | 5 years from the date of investment or until the child reaches the age of maturity, whichever is earlier. |
Why is lock-in period in mutual funds important?
A lock-in period in mutual funds plays a role in shaping investor behaviour and supporting the intended investment strategy of certain schemes. Here are some key reasons why it is considered important:
- Disciplined investing: A mandatory holding period may encourage investors to stay invested through market fluctuations. This approach can be particularly relevant for equity investments, where short-term volatility is common.
- Tax benefits for ELSS: In the case of the lock-in period in ELSS funds, the scheme offers tax savings under Section 80C of the old regime on the Income Tax Act, 1961 (under the old regime). Investors may claim tax deductions on the invested amount (up to Rs. 1.5 lakh per financial year) in exchange for staying invested for at least three years.
- Better fund management: When fund managers have a stable pool of assets (less prone to sudden withdrawals), they may be able to plan investments more effectively, potentially leading to better returns for all investors.
- Encourages long-term horizon: For certain goals like retirement or children’s education, a lock-in period aligns well with a long-term investment approach. It prevents the likelihood of impulsive withdrawals during market downturns.
What is lock-in period in ELSS mutual funds?
ELSS (Equity Linked Savings Schemes) are tax-saving mutual funds that come with a 3-year lock-in period. Here are the key aspects:
Tax benefit
- Investments up to Rs. 1.5 lakh in an ELSS fund are eligible for deductions under Section 80C of the Income Tax Act, 1961 (under the old tax regime).
- This deduction may help reduce taxable income, effectively lowering overall tax liability.
Growth potential
- ELSS predominantly invests in equities, which have the potential for higher long-term returns compared to debt instruments.
- The 3-year mandatory holding may encourage investors to stay invested through short-term market fluctuations.
Flexibility post lock-in
- Once the 3-year period ends, you can choose to redeem the units or remain invested.
- Each SIP instalment in ELSS has its own 3-year lock-in, so withdrawals need to be planned accordingly.
ELSS lock-in vs. other 80C options
- ELSS has the shortest lock-in among all investment options eligible under Section 80C of the Income Tax Act, 1961. For instance, Public Provident Fund has a 15-year maturity, and tax-saving FDs have a 5-year lock-in.
Due to this combination of tax savings and equity exposure, ELSS may be considered by investors looking to potentially grow wealth over time while optimising taxes.
Benefits of a lock-in period
A lock-in period can influence investor behaviour by encouraging consistency and alignment with long-term financial goals. Here are some key benefits of a lock-in period:
- Encourages long-term investing: By restricting early withdrawals, a lock-in period helps investors stay invested through market cycles, allowing time for potential wealth creation and compounding benefits.
- Reduces impulsive decisions: Market volatility can trigger emotional reactions such as panic selling. A lock-in ensures investors avoid short-term decisions and stay aligned with their financial objectives.
- Tax-saving advantage: In schemes like ELSS, the 3-year lock-in is linked to Section 80C benefits under the Income Tax Act, 1961 (under the old tax regime), allowing eligible investors to claim deductions while remaining invested.
- Promotes investment discipline: The fixed holding period encourages systematic and goal-based investing, particularly through SIPs, where each instalment is subject to its own lock-in period.
- Potential for returns over time: Equity investments can be highly volatile in the short-term and typically require a longer time horizon to potentially generate returns.
What to do after the expiry of the lock-in period?
After the lock-in ends, you have the freedom to continue holding or exit your investment:
- Continue to stay invested: If the fund has performed well* and aligns with your long-term objectives, consider staying invested till you potentially reach your goals. Exiting prematurely could result in missing out on potential compounding gains.
*Past performance may or may not be sustained in the future. - Redeem partially or fully: If you have a specific financial goal approaching, you can opt for partial or complete redemption. Review any exit load clauses, though many funds waive exit loads after a specified duration.
- Switch or reinvest: You may switch to another scheme within the same fund house if your risk profile or goals have changed. Or you may choose to redeem your units and reinvest them in a scheme with a different mutual fund company.
How to check the lock-in period of a mutual fund?
Understanding where to find lock-in period details is important to ensure that an investment aligns with your liquidity needs and financial goals. Here are some ways to check it:
- Fund documents: The Scheme Information Document (SID) or Key Information Memorandum (KIM) provides details of any lock-in periods. You can refer to the sections such as the “Load Structure” or “Key Features” for specifics.
- AMFI website / fund house website: You can often find product highlights, including lock-in period details, on the AMC’s official website or the Association of Mutual Funds in India (AMFI) website.
- Financial advisors: If unsure, you can ask your advisor or a distributor.
Always verify this aspect before investing, especially if you anticipate needing funds within a short timeframe.
Conclusion
The lock-in period of mutual funds may seem like a constraint at first glance, but it plays a significant role in fostering disciplined investing and optimising fund strategy. Whether you’re opting for an ELSS with a 3-year lock-in or exploring close-ended schemes, it’s crucial to align your scheme selection with your liquidity requirements and investment horizon.
By understanding the lock-in period meaning, investors can better manage mutual fund lock in periods without unwanted surprises. If your primary goal is tax savings, ELSS funds can be a suitable strategy. Ultimately, whether you decide to stay invested post lock-in or switch funds will depend on your evolving financial objectives, risk appetite, and overall portfolio strategy.
FAQs
What is the lock-in period for mutual funds?
The lock-in period is the minimum time during which you cannot redeem your investment.
Do all mutual funds have a lock-in period?
No, a majority of mutual fund scheme categories do not have a lock-in period. Only certain categories, such as ELSS funds and solution-oriented schemes, have one. Other open-ended equity, debt, or hybrid schemes generally allow free redemptions, subject to any applicable exit load.
Close-ended funds and interval funds don’t have a lock-in period per se, but units can be bought and sold from the mutual fund house only during specified intervals. Otherwise, investors need to buy or sell them on the stock exchanges.
Why is a lock-in period imposed on ELSS?
ELSS offers tax deductions under Section 80C of the old regime of the Income Tax Act, 1961. In exchange for this, investors have to adhere to a 3-year lock-in to encourage long-term investing.
What is the tax rebate that is available on ELSS funds during the lock-in period?
Investments in ELSS up to Rs. 1.5 lakh per financial year qualify for tax deductions under Section 80C of the old regime of the Income Tax Act, 1961. This reduces your taxable income and can lower your overall tax liability.
What is 3-year lock-in period?
The 3-year lock-in period refers to the duration you must stay invested in ELSS funds. You cannot redeem or transfer these units before completing three years from the date of investment. After the lock-in ends, you have the choice to exit or remain invested based on your financial goals.
Can I redeem mutual funds before the lock-in period ends?
No, mutual funds with a lock-in period cannot be redeemed before the period ends. The lock-in period is mandated to ensure investors stay invested for a minimum duration, promoting long-term investing discipline and potential wealth creation over time.
Does SIP in ELSS have a lock-in period?
Yes, SIP investments in ELSS have a lock-in period of three years for each instalment. This means every monthly SIP investment will complete its lock-in separately, allowing redemptions only after three years from the respective investment dates.
Do closed-ended mutual funds also have lock-in periods?
Closed-ended funds do not have a lock-in period per se, but they have a fixed tenure until maturity, during which investors cannot redeem units back to the AMC . However, the fund may be listed on stock exchanges and units can be bought and sold through the secondary market, subject to demand and supply.
What should investors do after their lock-in period ends?
After the lock-in period ends, investors may redeem or continue holding their units based on financial goals and market outlook.
How does lock-in period impact tax benefits?
For ELSS funds, the lock-in thus protects the integrity of tax-saving schemes while promoting disciplined, long-term wealth creation.
Is the lock-in period the same as the investment tenure?
No, the lock-in period and investment tenure are not the same. The lock-in defines the minimum period before withdrawal is allowed, while tenure refers to how long the investor chooses to stay invested. Investors may continue holding units even after the lock-in expires.
Can I switch funds during the lock-in period?
No, switching funds during the lock-in period is not permitted. In ELSS and other schemes with lock-ins, any switch or redemption request before the period ends is rejected. Investors may switch or redeem only after the lock-in duration has fully expired.
