What is Lock In Period in Mutual Funds?
Mutual Funds have been one of the most dependable investment options for many years. It is reliable and many elders advice young people to invest money in them. However, terms like lock in period can make mutual funds difficult to understand. It is the reason why we are exploring this term today but before that let us learn about mutual funds in brief.
What are Mutual Funds?
The name gives away the concept when we talk about mutual funds, as they are funds of multiple people collected and invested together for a specific period of time in exchange for steady returns or high returns depending on the type of fund. Here the money of the investors is clubbed together and generally invested in securities. Mutual funds are overseen by government bodies so that the investor’s money stays safe. Mutual funds can be of many types. They can give a quick return if you are willing to take some risk, or they can give guaranteed returns if you are willing to be patient. Also, you have open-end funds, closed-end funds, index funds, unit investment funds, etc. Over the years, a lot of people have found this investment route to be safe and more likely to succeed, and thus a lot of people have migrated to this market.
What does Lock in Period mean?
Most people buy new smartphones and use them for at least a year before they dump them for a newer one. This period of a year is what you call a lock in period. In terms of mutual funds, this is the period in which you are holding a mutual fund and can’t sell it. It is a fixed period and your holding is also fixed with you till the mentioned period has passed away. The period can vary for each type of mutual fund.
When we talk about public provident funds, you are looking at a lock-in of 15 years. An equity-linked savings scheme mutual fund is locked in for a period of 3 years in most cases. A 5-year lock-in comes into the picture when we talk about tax-saving fixed deposits. In the case of 8% Government of India bonds, the period of lock is 6 years. Unit-linked insurance plans are, at the very least, locked in for a period of 5 years.
Further, a lot of other plans have their lock-in time. However, lock-in does not mean that once the period is over, the scheme needs to be ended. Post-lock-in time, the decision of holding or selling a scheme needs to be re-evaluated, and only then a decision needs to be made. The period of lock-in is very important, and now we look at why.
Importance of Lock in Period
You must be wondering why lock in period is needed at all. Given below are some points that highlight the importance of it.
Once your investment is locked in for a fixed time, it provides stability to your investment, which otherwise many would sell off for even minuscule profits. This also ensures you are in it for a long time. Not only does lock-in get you invested for a long time, but also brings liquidity at the same time. If someone wishes to get a deduction in income tax on their income, then this period comes in handy. The company you invest in gets to keep your funds for a longer period, which they can then use to set up themselves nicely. Investors tend to take profits and run from stock to stock, but that might hurt the company’s growth and thus lock-in puts an end to that. If you make an investment based on a goal, then lock-in time becomes your best friend.
How to break Lock in Period of Mutual Fund
A lot of you people must have asked yourself and asked around how to break lock in period of mutual fund and must have found no answers. Allows us to explain what can be done to resolve this matter. You simply can’t break a mutual fund’s lock in period. The best bet you have is to go for a mutual fund scheme that does not have any lock-in time if you feel that you may need the money in the future or during an emergency. However, if you do end up getting stuck with an equity-linked savings scheme, then the fund locks in your money for a period of 3 years. What do you do now? Your only realistic option includes getting a loan against a mutual fund, also known as LAMF. The problem with a loan against a mutual fund is that it is usually available for a huge sum and you are charged anywhere between 10 to 50% of the value of the security’s buying price. However, LAMF also gets you tax benefits and looks after your emergency needs as well. Also Read: What XIRR means in Mutual Funds?
No Lock in Period Mutual Funds Meaning
As stated above, if you expect that you might need money in the future or want to be prepared for a rainy day, then it is better to invest in a mutual fund scheme that comes with no lock-in time. No lock in period mutual funds meaning is the opposite to that of a lock in time fund. In the former case, you are not liable to hold the stock for a fixed amount of time and can sell it off whenever you want to. Mutual funds come with an exit load. Earlier there was also an entry load, but that is no longer in use and has been put to rest. In an exit load, you, as an investor, are liable to pay a certain sum for exiting a scheme during a predetermined term. In that case, you will pay some amount and withdraw your investment. This amount is calculated using a formula. To save money and maximize your earnings, your best bet would be to go for a scheme that has no holding period and a short exit load period, so there you might avoid paying money for failing to meet either criteria. So there you have it. Now you know what lock in period means when it comes to mutual funds. You might also come across the term in the case of IPO or certain other investment pathways. Other doubts like no lock in period mutual funds meaning have also been answered in the above article. This much knowledge should be sufficient for any reader out there to start thinking about mutual funds seriously. Any other question bothering you must be researched because it is always important to do a little of your own looking around.
