Lock-in Period - Definition, What Is Lock-in Period, Advantages Of Lock-in Period
The lock-up or lock-in period is a timeout for your investments when you can not sell or cash them out. It is a mandatory waiting period for assets such as hedge funds, initial public offerings (IPOs), some startup investments, and ELSS (tax-saving) funds.
This blog discusses the lock-in period for various asset classes, focusing on tax-saving ELSS, their significance, and the actions to take once the lock-in period concludes.
What Is The Lock-in Period?
During a lock-in period, investors are prohibited from selling or redeeming their investments. Lock-in periods serve various purposes depending upon the investment instrument. For example, lock-in periods for promoters in an IPO prevent the market from being flooded with shares. This allows the stock market to discover the company's price and maintain a greater degree of stability in the share price.
Why Is The Lock-in Period Important?
- Lock-in periods act like a set arrangement for fund managers, preventing rushed choices from investors who may get nervous during market ups and downs.
- New investors might withdraw funds impulsively. The lock-in period ensures the money stays put for at least a defined period and markets remain more stable.
- Hedge fund managers appreciate the time provided by lock-in periods to exit investments, preventing sudden or frequent withdrawals that could disrupt the overall portfolio balance.
- Since anchor investors might easily cash out as soon as a stock list to take advantage of listing gains, many market analysts think lock-in periods are essential. The lock-in period benefits the firm and its investors by stabilising the share price immediately following an initial public offering.
- Lock-in periods in mutual funds guarantee steadiness by preventing excessive redemption, which can result in liquidity issues.
Mutual Fund Lock-in Period
The lock-in period for a mutual fund keeps the fund steady and balanced. It also lets investors grow their money over time and enjoy the perks of long-term investing. Let us take ELSS mutual funds as an example. They have a lock-in period of 3 years and provide great returns.
What To Do After The Expiry Of The Lock-in Period?
After the lock-in period expiry, investors can follow the approach mentioned below:
1. Investment Or Fund Performance Review
Evaluate how your investments have been doing. Let us say you invested in tax-saving ELSS funds with the potential for long-term returns. Post-lock-in, your mutual funds become open-ended i.e. you can withdraw anytime. You have two choices now. You can remain invested in the same fund and reap long-term returns based on the fund’s past performance or move your money to another tax-saving scheme that better fits your investment goals.
2. Redeem The Units Of Your Investment
If you decide to divest your ELSS fund, you can simply redeem your units or switch to another fund online and offline.
Lock In Period Of Tax Saving Investment Schemes
According to the Income Tax Act Section 80C, various tax-saving investments with lock-in are ELSS funds, Public Provident Funds, Tax Saving FD, National Saving Certificates, and NPS.
The lock-in period of these assets is as follows:
Scheme Name | Lock-In Period |
Tax Saving FD | 5 Years |
PPF | 15 Years |
NPS | Till 60 years |
NSC | 5 Years |
The lock-in period for tax-saving instruments is usually longer, and investors are rewarded with lower tax rates after the lock-in expires.
Lock-in Period For Other Non-Tax-Saving Investments
The lock-in period of these assets is as follows:
Scheme | Lock-In Period |
IPO | *90 + 30 days for anchor investors |
Hedge Funds | 30 to 90 days |
Unit Linked Insurance Plans (ULIPs) | 5 years |
Fixed Deposits | 7 days to 10 years |
*The Indian stock market employs the following lock-in periods, as outlined by SEBI regulations:
- 50% of the shares allocated to the anchor investors are subject to a 90-day lock-in period beginning on the allotment day, followed by another 30-day lock-in period for the remaining 50%.
- For promoters, the lock-in period is 18 months for allotment up to 20% of the post-issue paid-up capital. Allotments above 20% of the post-issue paid-up capital are subject to a 6-month lock-in obligation.
- The lock-in time for non-promoters is now 6 months instead of 1 year.
Conclusion
A lockup period is not just about limiting the sale of investments; it is an opportunity for investors to nurture their financial growth. Knowing the lock-in duration allows you to better plan for liquidity and cashflows for your total portfolio. For more informative investment guides and exploration opportunities, follow Grip Invest.
Frequently Asked Questions On Lock-in Period
1. What are the benefits of the lock-in period?
The lock-in period has many benefits, such as commitment, promoting long-term investing, discouraging impulsive exits, and ensuring wealth generation.
2. What are the lock-in period disadvantages?
The lock-in period restricts investors from changing their investments in case of emergency fund requirements.
3. Is the lock-in period legal in India?
Yes, the lock-in period is legal in India.
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