Lock in Period in Mutual Funds, NPS, NSC, PPF, Tax Saving FD

What is Lock-in Period?

The Lock-in period is the time period during which investors are not allowed to make redemptions or sell their investments. Investors are restricted to sell their units until the lock-in period is over. After that, investors are allowed to make redemptions or sell their units as per their will. 

Lock-in period is applicable to different types of investments including ELSS funds, Hedge funds, Tax-Saving FDs & other savings schemes. The objective of lock-in period is generally to restrict the investors from selling their investments based on market events & irrational behaviours and therefore maintain liquidity. Sometimes high redemption pressures in investments might lead to capital losses as the management would have to sell their holdings or underlying securities at discounts to meet redemptions.

Also, a lock-in period has been kept for some specific investments which offer tax benefits to provide investors a disciplinary approach to long term investing.

Let's have a look at the lock-in period of various types of investments: 

1. Lock-in Period in Mutual Funds

Mutual Funds are the pooled investment vehicles which invest in marketable securities as per the investment objective of the scheme.

Mutual Fund investments have a lock-in period to restrict their investors from making redemptions & let them follow a long term approach to investing. Especially in equity based funds, investing for the long term helps to offer high returns over time. 

Closed-Ended Mutual Funds

Closed-ended mutual funds are those mutual fund schemes where investments can only be made during the NFO period. After that, investors are not allowed to make investments or redemptions in these funds. Investors can redeem only after the expiry of the specified lock-in period.

The objective behind keeping a lock-in period in closed-ended funds is to maintain stability in the fund. As the fund manager would then be able to stick to an investment strategy in the absence of situations like high redemption pressures. 

So, Closed-ended funds will have the potential to generate higher returns over the period.

The lock-in period varies across schemes. It is generally in the range of 3-7 years.

Open-Ended Mutual Funds

Equity Mutual Funds are those mutual fund schemes which invest in equity & equity-related securities of the companies to generate returns for their investors. There are 10 different sub-categories of equity mutual funds as per SEBI categorization. And only ELSS (Equity Linked Savings Scheme) or Tax-saving Funds is the category which carries a lock-in period of 3 years. 

Debt Mutual Funds are those mutual funds which invest in debt securities like bonds, papers & other money market instruments to generate returns for investors. They are comparatively stable than equity funds. 

These funds do not have any lock-in period for investments. 

Also Read: Long Duration Debt Funds: Meaning, Type, Risk, Returns, Benefits

Hybrid Funds are those mutual funds which invest in equity as well as debt securities to generate returns for investors. They are comparatively stable than pure equity funds but volatile than debt mutual funds.

These funds also do not have any lock-in period for investments.

Read: Conservative Hybrid Funds: Meaning, Benefits, Returns

2. Lock-in Period in Hedge Funds

Hedge Funds are those alternative investment vehicles which pool money from HNI, UHNI, pension funds, institutional investors & other investors to invest in market securities using complex investment strategies. These funds aim to reduce downside risks by taking positions in other related securities.

They generally have a lock-in period to restrict investors from making redemptions. The lock-in period differs across funds as per their liquidity requirements.

3. Lock-in Period in Tax saving FD

Fixed Deposits are one of the popular investments among Indian citizens for their safety & simplicity. They offer a fixed rate of interest on the deposits made by depositors as per the tenure of investment. 

Tax-saving FDs are those Fixed deposits which are eligible for claiming tax deductions under section 80C of the Income Tax Act,1961. These FDs offer dual benefits of long term investment & tax advantages.

These FDs have a lock-in period of 5 years.

4. Lock-in Period in Provident Public Fund (PPF)

Public Provident Fund is a long tenure savings scheme offered by India Post- a government-backed postal services entity. The 15-year long tenure of this scheme allows investors to build a large corpus over the long term through regular investments every year. Moreover, investments in PPF scheme are eligible for claiming tax deductions of up to Rs.1.5 lakhs under Section 80C of Income Tax Act,1961. Also, it comes under the EEE-Exempt category in terms of taxation which means contributions, withdrawals & maturity proceeds are exempt from taxes.

The lock-in period in the PPF scheme is 15 years.

5. Lock-in Period in National Pension Scheme (NPS)

National Pension Scheme is a retirement savings scheme launched by the Government of India. The objective of the scheme is to ensure a systematic architecture for regular savings & investments by investors for meeting their long-term needs. The subscribers need to choose the desired asset allocation or an auto allocation mode for their contributions. At retirement, they are allowed to withdraw 60% of the corpus as lump-sum & the rest 40% needs to be used for buying an annuity which could offer regular pension to account holders.

The scheme has a lock-in till the retirement of an individual i.e 60 years of age.

Must Read: NPS Vs PPF: Comparison, Tenure, Risks, Returns, Tax Benefits & Which is Better

6. Lock-in Period in National Savings Certificate (NSC)

National Savings Certificate (NSC) is a small savings certificate scheme backed by the Government of India. The objective of the scheme is to encourage small savings and investments among citizens for meeting their financial goals & requirements. The scheme offers tax deductions of up to Rs.1.5 lakhs under Section 80C of the Income Tax Act,1961. 

The scheme has a mandatory lock-in period of 5 years during which withdrawals are not allowed.

Also Read:

Open Ended Mutual Funds: Meaning, Benefits, Comparison with Close Ended Funds
Best  ELSS Tax Saving Mutual Funds in India
ELSS vs ULIP: Risk, Cost, Returns, Coverage, Tax Benefits, Which is Better
Growth Funds: Meaning, Risk, Returns, Benefits, Taxability
Index Funds - Meaning, Purpose, How to Work, Risk, Returns
Alternative Investment Funds: Types, Risk, Investment, Taxation