A mutual fund is an investment tool where many people combine their money to earn profit from their invested funds. The person in charge of managing this collection of funds is a fund manager or a portfolio manager. Mutual fund management is the primary responsibility of fund managers, who are skilled and experienced and have sufficient knowledge in assessing investments as they know when and where to invest the funds to earn more and more profit. Usually, fund managers are associated with an asset management company. An asset management company brings investors together and makes investments with their funds.
The fund management companies distribute the investment profits or losses according to each investor’s unique contribution to the fund. The fund manager, or AMC, buys stock in the stock exchange on behalf of mutual fund owners. All the shareholders receive the profit accordingly generated by their invested capital in the stock exchange. SEBI (Securities and Exchange Board of India) supports the mutual fund business in India. The country’s capital markets regulator supports the mutual fund business as it has developed an organisation that benefits investors and other parties involved in it.
What does the lock-in period in mutual funds refer to?
The lock-in period refers to the length of time during which the investment or funds cannot be sold, redeemed, or withdrawn. The investment duration in a fund is not necessarily the same as its lock-in period. The length of the investment may exceed the lock-in term. Private equity IPOs, hedge funds, and some mutual funds mostly have lock-in periods. When the lock-in period is over, they can assess the fund’s performance and choose whether to keep or redeem the money invested. There are primarily two kinds of investment schemes in mutual funds regarding lock-in periods:
- Open-Ended Schemes: These schemes allow investors to redeem or exit their investments without any lock-in period. There are equity-linked savings schemes (ELSS), which have a lock-in period of three years, but you can pay an exit load and sell these open-ended mutual funds within a year.
- Close-Ended Schemes: Fixed-period schemes where investments have a fixed lock-in period of three to five years are known as close-ended schemes. It implies you cannot access funds from these accounts until the lock-in period ends. During this period, the investor cannot totally or partially withdraw or redeem the deposited amount or the assigned units, which is called a close-ended mutual fund scheme.
The importance of the lock-in period in mutual funds
The lock-in period of a mutual fund is significant as it prevents investors from redeeming units until the last minute. Keeping the mutual fund investment longer allows investors to reap a good return. The lock-in period helps investors be detained for a more extended period, and to prevent frequent redemptions of the funds, asset management companies (AMC) set a certain lock-in period. Asset management companies are responsible for holding investments for extended periods to receive the best possible return from equity investments.
Advantages of Investing in Mutual Funds
The main benefit for investors in mutual funds is converting the purchased units into cash. In simple words, this is called liquidity. The Securities and Exchange Board of India (SEBI) closely monitors mutual funds as it has well-defined rules to guarantee liquidity. Liquidity is a crucial factor in mutual funds, which comprise most schemes. Access to mutual funds is simple, as the invested asset can be easily turned into cash. The fund managers or asset management companies allocate the corpus across different securities, such as stocks, bonds, gold, and other assets, to produce potential returns.
Money is transferred to the investor’s selected bank account within three working days after the redemption. The process of redeeming mutual fund schemes is as easy as pressing a button, whether it’s done online or through a physical application. Despite the easy process of redeeming mutual fund assets, you should surely get the most value from the investment.
Redemption of Mutual Funds.
In an open-ended scheme, an investment may be redeemed at any time. There are no restrictions on investment redemption unless it is an investment in an equity-linked savings scheme (ELSS), in which case a lock-in period is three years from the investment date. A three-year lock-in period is required for equity-linked savings schemes or ELSS funds. It is an excellent choice for investment plans to save taxes. ELSS has the shortest lock-in period among all tax-free investment choices.
But sometimes, investors don’t take it seriously and proceed with redemption. To discourage speculative or short-term investors from participating in such redemptions, AMCs typically charge an exit load. The applicable exit load on an investment is always charged to investors. This exit load is not applied with closed-end schemes, as the purchased units are automatically redeemed on maturity. The units of the closed-ended plan are listed on a reputable stock exchange, and here, the investors can sell their units only after the lock-in period expires.
How can mutual funds be redeemed before the lock-in period?
Mutual funds with a lock-in period can often be redeemed at any moment in open-ended schemes. However, some mutual fund programmes, such as the ELSS (Equity Linked Savings Scheme), have redemption restrictions that last three years from the programme’s commencement date.
While buying a mutual fund scheme, you might have heard the term “entry loads.” The Mutual Fund charges these fees as transaction costs when you buy or “enter” a scheme.
When you sell or “exit” a scheme or if you plan to withdraw money from your account earlier than expected, you can do so only after paying the appropriate penalty; this is called “exit loads.” Particularly, exit loads are charged only when mutual funds are redeemed before the expiration of the lock-in period. Therefore, if an early withdrawal request is made, these exit loads – typically 1%—should be carefully evaluated so the fund managers’ fees do not negatively impact your net earnings. There are some methods for investors to take money out of mutual funds before the lock-in period:
- Utilising AMC: Asset management companies (AMC) collect and distribute investors’ funds across many mutual fund schemes using an internal research matrix. In this situation, you can request redemption of your mutual fund from the AMC.
- Through a trading or Demat account: By entering your DEMAT account and selecting the number of units you want to sell, you may apply to the redemption of funds if you have a DEMAT account.
- Using a distributor or agent: You can contact the representative of the portfolio manager or fund manager looking after your investments. He can complete the entire redemption process on your behalf.
- On your own: You might also use app-based investment services to redeem or withdraw your mutual funds whenever convenient.
Conculsion.
Investors must carefully evaluate the redemption or withdrawal procedures before they invest in a mutual fund. It is advisable to keep your money invested if you do not have a genuine reason to withdraw it. Market volatility can occasionally be frightening. An investor should always have patience under the circumstances of market ups and downs and retain his investment to gain in the long run.
FAQs.
Withdrawing from an ELSS before the three-year lock-in period expires carries no specific penalties. However, the previously claimed tax advantages would be withdrawn from the investment amount.
There would be a specific penalty if you want to withdraw from the mutual fund before one year. It is known as the “exit load” penalty. The exit load is about 1 per cent of the total amount withdrawn.
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