Understanding lock in period in mutual fund

The Lock in period is a specific timeframe during which investors are not permitted to sell/redeem their mutual fund holdings. This concept is prevalent in various investment avenues, including startups, hedge funds, private equity IPOs, and certain mutual funds.

To learn and understand what is the Lock in period in mutual funds and its importance, read the article below.

Lock in Period Meaning

The Lock in period is the time during which investors are limited to withdrawing their investments in mutual funds. However, investors can sell/redeem their investments once the Lock in period has expired.

When a private equity firm offers initial public stock, lock periods are regular. The company's managers are limited to sell/redeem their shares immediately after the initial public offering. The lock is also applied to hedge funds and startups. For the purpose of maintaining portfolio stability, hedge funds use it. At the same time, it's being used by entrepreneurs to store cash for their startups.

It is not unusual for mutual fund investments to have a Lock in period. A Lock in period is in place for all closed-end mutual funds. There is no Lock in period for open-ended mutual funds, except for certain categories which have a specific Lock in period. This means that during this period, investors are prevented from sell/redeem their investments. After this period, investors may continue to own the Fund or sell/redeem their mutual fund units for as long as it exists. However, if investors leave within a year, they may be charged an exit fee.

Why is the Lock in Period Important?

For investors, locking in a period is essential to potentially earn from investing. Most investors do not know how to react to small market movements. Investors can hold on to their investments for some time and may get benefit from long-term investments by having a lock period.

In order to ensure the stability of the fund, mutual fund investments have a fixed period. Excessive selling/redeeming could lead to more significant redemptions, which may cause liquidity problems for the fund. Thus, the preservation of liquidity is facilitated by a Lock in period. Investors will be prevented from sell/redeem their units, and the fund's assets will remain stable by such period. It's in the interest of investors. Investors can hold on to their investments for some time and can potentially gain from long-term investments by having a lock period. Mutual funds, therefore, seek to safeguard the wealth of investors in order to maintain market stability.

Mutual Fund Lock in Period

The Lock in period for mutual funds is as follows.

1. Equity Funds

In equity funds, certain types of funds have a Lock in period. This Lock in period is a specific timeframe during which investors are not permitted to sell/redeem their mutual fund holdings. The Lock in period varies depending on the type of fund and the regulations set by the governing bodies. After the Lock in period, investors are free to sell/redeem their investments. However, if the holding term is shorter than a year, they may be liable for Short Term Capital Gains tax (STCG). Please note that the tax implications can vary based on the specific fund and the investor’s individual tax situation. It’s always recommended to consult with a financial advisor or tax consultant for personalized advice.

2. Debt Funds
The debt funds category consists of 16 types of debt mutual funds. These include Liquid Funds, Ultra Short Duration Funds, Low Duration Funds, Money Market Funds, Short Duration Funds, Medium Duration Funds, Medium to Long Duration Funds, Long Duration Funds, Dynamic Bond Funds, Corporate Bond Funds, Credit Risk Funds, Banking and PSU Funds, Gilt Funds, Gilt Funds with 10-year constant duration, Floater Funds, and Overnight Funds. There is no Lock in period in any of these 16 funds.

3. Hybrid Funds

Hybrid funds do not have a lock period, as do other types of mutual funds

What to do if the Lock in Periods Expires?

1. Redeem the investment

The Lock in term should not serve as an essential component of an investor's investment tenure. In the interests of investors and to maintain the liquidity and stability of the fund, a lock period is imposed. Redemption of investments is justified in the event of medical emergencies or uncertainties.

If one reaches the financial goal or if fund performance does not match that objective, it may also be possible to withdraw investments.

2. Assess the performance

Mutual funds can be used for both income generation and capital appreciation purposes. The majority of investors are looking for both these benefits when investing in mutual funds. They will redeem the investment at the end of the Lock in period and may choose to invest in a new mutual fund. This, however, limits investors’ benefits.

Mutual funds are invested in various asset classes. They’re diversified portfolios managed by an experienced fund manager. The fund manager charges fees for these services. For the possibility of seeing results from mutual fund investments, it might be an option for investors to stay invested in these funds over an extended period. Post the lock-in period, conducting a fund review could be a consideration for investors.

3. Choose to Continue investing or not

Investors may review their investment in the mutual fund after the Lock in period. To do this, they must align their objectives with the fund’s performance. Investors can remain invested in the fund if it grows and is consistent with their financial objectives. However, it is preferable to redeem that investment and enter a new mutual fund if the fund’s performance does not match the investor’s objective.

FAQs on Lock in Period in Mutual Funds

What does a three-year Lock in period mean?

No unit redemption or withdrawal of the invested amount will be permitted during the three-year Lock in period. The investors will be entitled to redeem the units in partial or full upon completion of the lockup period.

What happens when the Lock in period ends?

The relevant investors or promoters who own shares in the company at the end of the lock in period are thus permitted to dispose of those shares.

What happens to mutual funds after the Lock in period?

Mutual Funds becomes an open-ended equity fund as soon as the lock period expires. You should either remain invested or take the option of taking a partial or complete withdrawal of your funds.

How does the Lock in period work?

The period in which the investment cannot be sold or redeemed is referred to as a locked period or lockup period. Hedge funds, initial public offerings of private capital, start-ups and a few mutual funds often use lock periods. You cannot withdraw funds without prior notice when the lock period expires.

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

ELSS Investments are subject to a 3-year lock in period and are eligible for Tax Benefit under section 80c of Income Tax Act, 1961.

“As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS”

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

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