What is Mutual Fund Lock-in Period & How it Works?

1. Restricts Trading

A mutual fund's lock-in period is essential to restrict investors' urge to trade the units. By sticking with it for a longer period, investors obtain maximum benefits from investing in mutual funds.

2. Stabilises Fund Performance

Stabilizing mutual funds is also crucial. Otherwise, frequent modification in the units or fund size may affect returns. This may also lead to liquidity issues due to imprudent selling within a short time.

3. Encourages Long-Term Investment

The lock-in period promotes long-term investment because it motivates the investor to hold onto the investment for a longer period and prevents short-term fluctuations from influencing investment decisions.

4. Lock-In Period

This is crucial for money put in through investors' schemes, like ELSS, to remain eligible for section 80C tax advantages so that the tax benefits do not end too soon. Always plan your investment timeline to increase tax benefits and returns.

5. Reduces Market Timing Behaviour

Lock-in reduces the likelihood of market timing as investors cannot attempt to time their investments; instead, they look to the long-term growth of investments and do not react to short-term volatility.

6. Investor Discipline Improvements

Investors will be more likely to stay on course in their financial objectives, as they know that their money is invested for a certain time. Hence, they will be more disciplined about investments, reducing emotional decisions.

7. Ensures Fund Liquidity Management

This provides the fund management with a lock-in period that manages the cash flows appropriately and brings about fewer sell-offs of existing assets at untimely redemption calls that disturb fund stability.

8. Facilitates Growth of Funds

A lock-in period gives the fund uninterrupted growth since the capital is invested more extended, allowing return compounding and helping long-term investors. It encourages patience and discipline.

1. Evaluate the Investment Performance

Once the period of 3 years is over, you must review your investments. For example, ELSS funds offer both tax benefits and long-term capital appreciation. However, most investors mistake using it just as a tax-saving tool. Therefore, they transfer the money to invest in another ELSS fund.

These multi-cap funds invest in equity, which only grows to the fullest within 3 years. You must stay invested in the fund for at least 5 to 7 years for maximum realization of returns.

2. Decide Whether to Stay Invested or Not

You can continue your investment as an open-ended fund after the expiry of the lock-in period of mutual funds. Besides, you can transfer the money to any other scheme that matches your investment objectives.

However, if the fund's performance aligns with your investment objectives, you must continue. If the performance review does not align with your goals, it is better to redeem and invest newly.

3. Redeem the Units of Your Investment

You must not consider the lock-in period as your investment tenure and exit the fund after it ends. Redeeming only for genuine requirements, such as a medical emergency, is wise.

As the fund becomes open-ended, you have the option to redeem the units as a whole or in a lump sum. Therefore, you can redeem only a portion of your investment instead of completely exiting it.

1. Panic Selling

Avoid making impulsive decisions based on short-term market movements. Before deciding to sell, consider the market's condition and your long-term goals. The potential impacts on your investment strategy. Stay patient and focus on your broader objectives.

2. Withdrawing Prematurely

Do not liquidate the investment based on the end of the lock-in period. Check whether the fund aligns with your investment objectives and whether it is time to exit. A premature withdrawal can derail your long-term strategy.

3. Overlooking Tax Consequences

In particular, be aware of tax liabilities for long-term capital gains. Liquidating after the lock-in period may attract tax implications. This will be reflected in your returns. Factor these into your decision to ensure the net benefit is worth the move.

4. Automated Reinvestment Without Goal Review

Do not continue to reinvest in the same fund without reviewing your current financial goals. Your investment plan will have to change when your circumstances do. Regular evaluations ensure your money works effectively for you.

5. Ignoring Fund Performance and Alternatives

Avoid sticking with a mutual fund if its performance has underperformed or if better alternatives are available. Always review your investment options to ensure optimal returns. Diversifying or rebalancing can help improve your financial outcomes.

6. Not Considering Your Liquidity Needs

If you need liquidity, do not invest large sums of money in funds that are difficult to access quickly. Think about your short-term financial needs before making decisions post-lock-in. Having access to emergency funds is crucial for financial flexibility.