Lock-in period meaning, types and relevance

Remember back in school when all students had a timetable to follow. Every class had a dedicated schedule, and once you were in, you couldn’t get out until the bell for the next period rang. Some mutual funds, as well as several other types of investments, have a similar concept. However, instead of a timetable, they have a lock-in period. Once you invest, you stay invested until the lock-in period is over.

You can keep reading to find out more about the lock in period meaning and how it affects some mutual funds.

What does a lock-in period mean, and how does it work?

A lock-in period is a period during which you cannot sell or redeem your money from a mutual fund scheme. In India, equity-linked saving scheme (ELSS), one of the popular tax saving investments, is the only type of mutual fund that has a lock-in period. So, once you invest in ELSS, you have to stay invested for at least three years.

The lock-in period is different from the term of the investment. For instance, ELSS funds are equity schemes that have a lock-in period of three years. However, the investment term for these funds can be 10, 15, 20 years, or more, depending on your goals.

What happens after the lock-in period?

Once the lock-in period is over, you are free to withdraw your money. However, it may be advised first to assess the performance of your investment, evaluate your goals and needs, check the market conditions, pay attention to tax planning and other similar factors, and then make a move. Just because you can withdraw your funds does not mean you have to. In most cases, you may benefit from letting your investment be as it is so that it can grow more in value through compounding.

You can also use an SIP return calculator to get a better idea of your investment value and its potential for growth and then make a decision. 

Types of lock-in periods

An ELSS mutual fund is not the only investment that has a lock-in period. Here are some other types of lock-in periods:

• Hedge funds: Hedge funds have a lock-in period ranging between 30 and 90 days.
• Tax saving fixed deposits (FDs): Tax saving FDs have a lock-in period of 5 years.
• Unit Linked Insurance Plans (ULIPs):ULIPs have a lock-in period of 5 years. You cannot make partial or complete withdrawals during this time.
• Public Provident Fund (PPF): PPF has a lock-in period of 15 years. Partial withdrawals are allowed after the 6^th financial year.
• National Pension Scheme (NPS): NPS has a lock-in period until the investor reaches the age of 60. Partial premature withdrawals are allowed subject to certain rules and conditions.
• National Savings Certificate (NSC): NSC has a lock-in period of 5 years. Premature withdrawals are allowed in certain cases.

To sum it up

The lock-in period is a critical deciding factor when selecting investments as it can impact your overall liquidity. If you have a short-term goal, it may be advised to pick an investment with a short or no lock-in period. However, in the case of long-term investments, lock-in periods have little interference.

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