Meaning of lock in period
- Lock in period or lock up period refers to that period for which investments cannot be sold or redeemed.
- Lock in periods are commonly used for hedge funds, IPOs of private equity, start-ups and few mutual funds.
- On the expiry of the lock in period, one must not withdraw the funds immediately. Instead, he or she must pause to evaluate the performance of the investment and see if it must be reinvested or redeemed.
- A lock in period does not define the tenure of investment.
- It is not just a restriction on investment but also an opportunity for new investors to grow.
Lock in periods for different investment
- Hedge Funds are usually kept for 30 to 90 days.
- Public Provident Funds are kept for 15 years.
- ELSS mutual funds are kept for 3 years usually.
- Tax saving Fixed Deposits are locked in for 5 years.
- 8% Government of India bonds are locked up for 6 years.
- ULIPs are locked in for a minimum of 5 years.
Please note: the list is non exhaustive.
Importance of Lock In Period
- It will help the investors stick to the investment for some time and reap the benefits of long-term investing.
- mutual funds have lock in periods to induce stability in the mutual fund while preserving liquidity.
- Lock in periods can also come handy when one wishes to claim deductions in the income from these investments from income tax.
- For hedge funds, the lock up period gives the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their portfolio of investments too rapidly.
- For start-ups or companies issuing an IPO, the lock in period helps the company build a business model on a solid footing and show market resilience. The lock-up period post IPO prevents stock from being sold immediately when the share prices may be artificially high and susceptible to extreme price volatility.
- Having a lock in period for goal-based investment is good.
