Mutual Fund Lock In Period

In the 21st century, savings has taken a new meaning with the advent of of multiple market linked investment avenues. Traditional channels of investment such as savings account and term deposits have limitations in terms of the returns they offer. On the other hand, investment options such as ULIPs (Unit Linked Insurance Plans) and Mutual funds have taken over the lot. A prime example of their growing popularity is the emergence of multiple products in this area by home grown as well as foreign companies.

Talking about today’s topic, a Mutual Fund is considered one of the most viable investment option for all types of income groups since it offers attractive returns at variable investment amount. It does not require infusion of heavy funds but a nominal amount would do. Most of the schemes offer higher returns when compared to conventional options. Let's tell you how it works followed by throwing light on the most interesting clause in Mutual Funds, the lock in period.

What should be done after your lock-in period expires?

Typically, closed-ended mutual funds come with lock-in periods. When the lock-in period for your mutual fund scheme comes to an end, you should ideally assess and evaluate the performance of your scheme. If the performance of your fund is lower than the benchmark rate, then you can choose to transfer your money to an open-ended mutual fund. This will help you gain higher returns efficiently. You will need to take note that when your fund’s lock-in period gets over, your returns can start to be negative or below average.

What should be avoided when your mutual fund lock-in period expires?

If you have a lock-in period for your mutual fund, such as an equity-linked savings scheme (ELSS), and when it expires, you should avoid encashing it instantly. There are many investors who tend to withdraw the money from the plan right after completing a lock-in period of 3 years. There are also some who use the same money to invest in a brand new ELSS particularly for claiming tax benefits. However, this can be a big mistake as this new investment may not result in good growth. Moreover, you may not be able to attain your other financial goals too.

When should you encash your mutual funds?

Even when the lock-in period of your closed-ended mutual fund expires, you should try to stay away from encashing it. You need to keep in mind that once the lock-in period of your ELSS or any other scheme expires, the fund becomes an open-ended scheme. Once this happens, you can withdraw money from your scheme at any point of time. You also do not have to pay any exit load or any tax for such withdrawals.

You should typically withdraw money from your ELSS only for important financial requirements such as emergencies.

What is a Mutual Fund?

It is a medium where multiple like minded investors come together and pool monies into a fund managed by a registered and established Asset Management Company. On behalf of the investors, fund managers pool the money in handpicked financial instruments such as company stocks, debentures, government securities and other viable options. The returns are then distributed to primary investors as per the units (based on value invested) held.

Since there is generally a large pool of investors, the risk or losses is distributed proportionally among the investors, making it a safe deal. In India, the operations and framework are regulated by SEBI (Securities and Exchange Board of India).

Owing to their popularity, there are many types of mutual funds available in India on the basis of structure and investment objectives. The most popular type of fund among the lot is ELSS (Equity Linked Savings Scheme) where you not only reap the benefits of attractive returns but also offer tax benefits under Section 80C of the Income Tax Act. Here, the fund manager invests the money in hand picked equity instruments for maximum exposure and returns.

However, it comes with a lock in period of three years which implies, the first investment made remains locked for three years from the date of debit. This clause is more or less valid for the SIP (Systematic Investment Plan) where the investor is given the option to pool same amount every month, akin to paying off a loan with a fixed EMI amount.

Need for Lock-In Period

During the lock-in period, the investor is barred from withdrawing or selling the units accumulated. It is done so to ensure the units are not subject to frequent modification which has the potential to disturb the equilibrium. Another supporting reason for the lock-in period is due to prevailing Income Tax laws where you can only claim deductions in the income on mutual funds that come with a certain lock-in period. During this period, the monies remains invested in the market giving it sufficient time to reap returns.

Since there are so many options available in the market today, it's paramount to make a detailed study on the product portfolio and performance of the fund before signing up. The safest bet would be to put money in a fund which has a combined exposure in debt and equity market. Further details on products can be obtained from the Mutual Funds section of this website.

When you retain your mutual fund without redeeming it before completing one year, taxes will not be imposed on your fund plan. With the help of a lock-in period, an investor can enjoy long-term capital gains. However, he or she will not have the flexibility to withdraw funds from his or her scheme for emergency purposes.

Mutual fund houses fix a particular lock-in period to retain their customers for a long period and to restrict them from selling or redeeming their funds too quickly. Lock-in periods are implemented in certain mutual fund products chiefly to confine investors from liquidating their funds very soon.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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