Lock In Period
Updated on March 11, 2023
A lock in period is a duration within which mutual fund investors cannot redeem their fund units after investing. Lock-in period is applicable up to the predetermined date from the time of investment. Although lock-in period is within the investment tenure, it is not the same as investment tenure.
Generally lock-in period is applicable to close-ended mutual funds. ELSS or Equity Linked Savings Schemes also come with a lock-in period.
Why is lock-in period needed in mutual funds?
Lock-in periods are placed on certain categories of mutual funds to discourage investors from exiting the funds earlier, which could result in losses or lower profits. Investors can fetch maximum benefits from staying invested for longer duration in certain types of mutual funds.
A lock-in period also allows stability to mutual funds. Frequent exits and changes to fund size may affect fund returns and give rise to liquidity issues.
What happens after lock-in period?
Instead of redeeming fund units immediately after a lock-in period, it is advisable for investors to conduct some research to aid their decision. Some pointers that investors should follow are:
a. Although the lock-in period of ELSS funds is 3 years, investors can wait for 5-6 years and check the fund’s performance before exiting. ELSS funds generally take time to grow and fetch returns.
b. Review fund performance before redeeming
c. In case an investor has a financial emergency, he/she can redeem fund units to cater to immediate financial needs.
d. If a fund has given returns above expectations during the lock-in period, investors can consider partial redemption after end of the lock-in period.