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What is the Minimum Lock-in Period in Mutual Funds?

With every investment comes certain rules and regulations on tenure, withdrawal and contribution limits, taxability, and more. With options like a SIP, lump-sum investment, etc., mutual funds are considered to be more flexible than many other investment choices like fixed deposits and government schemes. However, even mutual funds have specific rules. One such rule is the lock-in period.

Here’s all you need to know about the lock-in period in mutual funds.

What is a lock-in period?

The lock-in period refers to a time during which you cannot redeem your funds. The lock-in period starts the moment you invest your money and prohibits partial as well as complete withdrawals.

What is the minimum lock-in period in mutual funds?

There are different types of mutual funds in India, and not all of these have a lock-in period. Here are some things to note:

  • Close-ended mutual funds have a three years minimum lock-in period. This means that you cannot partially or wholly redeem your funds and must stay invested in the scheme for at least three years.
  • Open-ended schemes, on the other hand, do not have any lock-in period. This means that you can withdraw your fund anytime you want, and there is no penalty incurred on the withdrawal. However, you may have to pay an exit load (a small fee charged by the fund house).
    But there is one exception in open-ended schemes: Equity Linked Savings Schemes (ELSS). These are open-ended mutual funds with a 3-year lock-in period.

Why do some mutual funds have a lock-in period?

The lock-in period may seem like a restriction but can help you reap better rewards. Frequent buying and selling of units can impact the fund size that ultimately affects the fund’s performance. To ensure stability and better returns, the Government of India has imposed a minimum lock-in period on some mutual funds to limit investors from selling units too frequently. A longer investment tenure helps you earn higher rewards.

In addition, mutual fund schemes like the ELSS help you save income tax with tax benefits for each year that you stay invested. You can claim a tax deduction of up to Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. This allows you to further maximize your earnings.

To sum it up

There are several types of mutual funds that do not have a lock-in period. So, if the lock-in period bothers you, you can always select one of those. However, close-ended mutual funds and open-ended schemes like the ELSS can bring in a lot of stability and curb your urge to liquidate your funds sooner. So, adding them to your investment portfolio may be the right idea.

Regardless of what you choose, Tata Capital Moneyfy app available on Android and iOS have several mutual fund options that can help you achieve your financial goals and allow you to invest anytime, anywhere.

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