Lock in period- All you should know about its meaning & importance

Meaning of Lock in Period

Lock in period means the time period for which the invested amount in any investment instrument cannot be redeemed or sold. Lock in period is commonly associated with hedge funds, ULIPs, Government securities, private equity investments etc. Lock in period can be different from the maturity or redemption period of investments. It is meant only to retain investor for a particular time period. On the expiry of lock in period, the investor can make a pre-mature withdrawal or sale of his/ her investment.

Importance of Lock in Period

• Funds like mutual funds & hedge funds insist for lock in periods to assure liquidity over a certain period of time.
• Lock in periods is common where investments are made for the purpose of tax deductions as per the local laws of the country.
• Lock in period mandates an investor to be invested for a certain time period which in turn helps in generating better returns for the investor in long term.
• For start-ups and companies taking private equity, lock in period is important so that they could get enough time period to channelize the funds received for pursuing their business model.

Lock in periods for different investments

• Public Provident Fund have a maturity period of 15 years. Partial withdrawals are allowed after 5 years of opening the PPF account
• Equity linked saving schemes (ELSS) have a lock in period of 3 years
• Sovereign Gold Bonds (SGB) has a maturity period of 8 years. If SGBs are sold after 8 years, the entire amount of capital gain on SGBs would be tax free. Premature withdrawal is possible only after 6 months of the closure of the issue of SGB. After 6 months, SGBs gets listed on stock exchange where SGBs could be sold subject to capital gain tax.
• Tax saving fixed deposits have a lock in period of 5 years
• ULIPs carry a lock in period for a minimum of 5 years
• Lock in period for capital gain bonds purchased to get exemption under section 54EC is 5 years
• 8% Government of India bonds have a lock in period for 6 years

These are some examples of lock in period associated with various investments. This list is not exhaustive.

Disclaimer: The above article is meant for educational purposes only. Taxwink shall not be responsible for any loss or damage caused to any person from the use of any information contained in this article. Investors are therefore requested to read investment instructions/ manual of the scheme before making any investment.