Investing your hard-earned money is a pivotal financial choice, often accompanied by specific terms, such as a lock-in period. A lock-in period signifies a pre-established duration where investors cannot withdraw their investments without incurring penalties. This article explores the significance of lock-in periods across different investment avenues and offers guidance on actions to take once the lock-in period concludes.
What is a lock-in period?
A lock-in period is a specific duration during which an investment, usually in financial instruments like mutual funds or fixed deposits, cannot be redeemed, withdrawn, or sold. Investors are obligated to keep their money invested for the entire lock-in period, and they cannot access the funds until this period expires. The purpose of a lock-in period varies depending on the investment type but can serve to ensure commitment, discourage short-term trading, and promote long-term investing. Once the lock-in period ends, investors gain the freedom to make withdrawals or exit their investments without penalties or restrictions.
What is the Lock-In Period in Different Types of Investments?
- Mutual Funds: Typically, close-ended mutual funds come with a 3-year lock-up period. In contrast, ELSS Funds (tax-saving investments under Section 80C of the Income Tax Act, 1961) are the sole open-ended fund that imposes a lock-up period, applicable to both SIP and lump-sum investments. This tenure is shorter compared to other tax-saving investments, making ELSS a popular choice for tax planning.
- Tax-Saving Fixed Deposits: Tax-saving fixed deposits usually come with a lock-in period of five years. Investors cannot withdraw the invested amount during this period without incurring penalties.
- Government Bonds: The lock-in period for government bonds varies depending on the type of bond. For instance, National Savings Certificate (NSC) has a lock-in period of five years, while Public Provident Fund (PPF) has a lock-in period of 15 years.
- ULIP Funds: Unit Linked Insurance Plans (ULIPs) typically have a lock-in period of five years. This restriction ensures that investors stay invested for a reasonable duration to benefit from market-linked returns.
Why is Lock-In Period Important?
Lock-in periods serve several important purposes:
- Encouraging Long-Term Investing: Lock-in periods discourage impulsive decisions and promote a long-term investment approach. This can help investors accumulate wealth over time.
- Tax Benefits: In the case of ELSS and certain other tax-saving investments, the lock-in period is essential for claiming tax deductions under Section 80C of the Income Tax Act.
- Stability: For fund managers, knowing that investors are locked in for a specific period allows them to manage the fund's assets more efficiently.
What is Lock-In Period in ELSS Mutual Funds?
ELSS mutual funds have a lock-in period of three years, which is the shortest among tax-saving investment options in India. This lock-in period ensures that investors remain invested in equities for a reasonable duration, potentially reaping the benefits of market growth.
You can invest in ELSS funds on Bajaj Finserv platform and save tax on up to 1.5 Lakh rupees under section 80C.