What is lock-in period?

What is a lock-in period?

As the name suggests, your investment is locked for a fixed period during which you cannot access your money. For example, in IPOs, the lock-in period for anchor investors is 30 days and hence they cannot sell the stake in the company for up to 30 days after listing.

Mutual Funds

There are three types of mutual funds. They are close-ended, open-ended mutual funds and interval funds. Close-ended mutual funds have a minimum lock-in period of three to five years. Like Equity Linked Savings Scheme has a lock-in period of three years. Most other mutual funds don’t have a lock-in period.

For IPOs

In IPOs, the lock-in period for anchor investors is 30 days. Anchor investors get guaranteed allotment a day before the IPO opens to the public. They are normally given 60 per cent of the qualified institutional buyer quota.

Hedge Funds

Hedge funds, which cater to high-net-worth individuals and institutional investors, typically have a lock-in period anywhere between 30 to 90 days.

Fixed Deposits

Tax saving fixed deposits come with a lock-in period of five years. It allows you to make an investment to save tax under section 80C of the Income Tax Act.

ULIP Funds

Under Unit Linked Insurance Plan or ULIP you not just fulfil your long-term goals through periodic investment, but also get the benefit of insurance. It has a minimum lock-in period of five years.

Why is the lock-in period needed?   

Lock-in periods are put in place to ensure that investors stay invested and not panic to volatile market movements. This helps investors in the longer term. For IPOs, the lock-in period restrains anchor investors or the private equity firms from selling the stake immediately after listing and thereby preventing volatility in the share prices. For mutual funds, the lock-in periods help in maintaining the liquidity and stability of the fund.