A Brief Guide About Lock in Period in Mutual Funds

what is lock in period in mutual funds

Mutual Funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.

But, for most investors, investing in mutual funds itself does not seem easy because of the jargon this financial tool comes with like lock in period.

It was a mutual fund (S&P 500 Index Fund) that helped Warren Buffett win a million-dollar bet against wall street.

The point is that mutual funds create fortunes and to create yours you need to understand its basics.

And to clear one of your doubts, which is ‘what is lock in period in mutual funds?’ we have this article for you.

Without any fluff, let’s discuss the lock in period in mutual funds.

What is Lock in Period in Mutual Funds

Lock in period is the amount of time for which the investors cannot redeem, sell, or withdraw their invested capital.

In simple language, the mutual fund units you have bought, you cannot sell for a specific period and that period is called the lock in period in mutual funds.

Is it clear now?

If it is, then let’s discuss the lock in period for different mutual funds. It goes without saying that there are dozens of mutual funds you can invest in: equity mutual funds, debt mutual funds, hybrid mutual funds, etc.

Lock in Period for Different Mutual Funds

  • Open-ended mutual funds lock in period: No lock in period
    1. Equity fund: Equity mutual funds have no lock in the period except ELSS.
      • ELSS mutual fund lock in period is 3 years.
    2. Debt Fund: Debt mutual funds have no lock in period.
    3. Hybrid Fund: Hybrid mutual funds have no lock in period.
  • Close-ended mutual funds lock in period: 3-5 years
    1. Solution-oriented mutual fund: 5 years

*the lock in period is for both SIP & lumpsum investments

Importance of Lock in Period

Compound interest is the eighth wonder of the world. He who understands it, earns it: he who doesn’t, pays it.

Many investors think that lock in period is a curse for them. They think that mutual fund houses are doing bad to them by keeping their money for 3-5 years as they cannot liquidify it when they needed.

You have just read Einstein’s quote about compounding and I hope you got what is in it for investors in lock in period, but let’s decode it.

1. Importance of lock in period for Investors

Remember the million-dollar bet between Warren Buffett and Wall Street’s hedge fund managers that we mentioned at the beginning?

What was the tenure of the bet? It was 10 years. Yes, the bet was, Warren Buffett challenged the hedge fund industry in 2008 that S&P 500, which is an index fund, would outperform any chosen portfolio over 10 years.

Focus on the period: 10 years.

Investors must have to put their money in the long-term if they want to reap the benefits of mutual fund investing.

It is all about compounding. Long-term investing is value investing and the lock in period in mutual funds of 3-5 years is nothing in front of their tenure.

And aside from compounding, investors also get taxation benefits if they invest in ELSS, which is a tax-saving fund.

2. Importance of lock in period for Fund Houses

Lock in period is vital for mutual fund houses in the way that it buys them time to enter and exit an investment.

In the close-ended scheme, during NFO (New Fund Offer) the fund house raises the money and controls it for the next 3-5 years, which restricts the investors to withdraw the amount so that the invested capital does not suffer stability issues and the investor can get the maximum benefit.

How to Check Lock in Period for Mutual fund

To check lock in period for mutual funds, first, you need to select the fund and then in its details you can find the lock in period.

Below is an image of ‘Tata Digital India Fund Direct-Growth.’ In fund details, you can see the lock in period is mentioned, which is 0 years.

how-to-check-lock-in-period-for-mutual-fund

What to do after the Lock in Period

Well, it depends on the individual investor and their circumstances. But, let’s figure it out for you by going through a list, which will let you decide what to do after the lock in period of your mutual fund expires.

Here’s the list:

→ The first thing you should do is evaluate the fund performance. As you have waited for a couple of years, so see what the result of your patience is. 2 cases can happen:

  • Fund underperformed: The fund underperform because of two reasons: either because of the weak market sentiments or fund managers’ wrong calls. In the first case, it is up to you whether you want to give a second chance, but if it is the latter one, you should exit the fund.
  • Good returns: You can take out the money if you want or keep it invested in the fund.

→ It does not make sense to encash the invested capital and exit the fund just because the lock in period has ended. Remember, lock in period has ended not the maturity period.

→ After the lock in period, the close-ended scheme became an open-ended one. It means you can sell it at any time.

→ It is advisable to remain invested in case the fund is ELSS. Its lock in period is 3 years, but you should wait for 2 more years. Even after 5 years, if the fund is making your losses, so you better exit the fund.

Frequently Asked Questions (FAQs) about Lock in Period in Mutual Funds

Conclusion

Lock in period is the period for which you cannot redeem your invested capital i.e. it is the amount of time for which you cannot exit the fund.

Open-ended mutual funds except for ELSS (tax-saving fund) do not have a lock in period, while all close-ended funds have a lock in period of 3-5 years.

The fund house wants you to keep investing your money for this many years as you can only benefit the most when you invest for the long term.

Lock in period is also important for mutual fund houses as it helps them to stabilize the investment and fund.

Home Page

How useful was this post?

Click on a star to rate it!

Average rating 0 / 5. Vote count: 0

No votes so far! Be the first to rate this post.

Leave a Reply

Your email address will not be published. Required fields are marked *