June 15, 2024
New Delhi
Finance

How to Withdraw Mutual Funds Before The Locking Period

A mutual fund is a type of investment instrument where a lot of participants pool their funds to generate returns on their initial investments over a period of time. A fund manager also referred to as a portfolio manager, is responsible for overseeing this group of funds. His or her responsibility is to invest the corpus in various securities, including bonds, stocks, gold, and other assets, with the goal of generating prospective returns. The fund manager splits the gains (or losses) on the investment according to the investor’s individual contributions to the fund.

In other words, a Mutual Fund is a professionally managed investment program, typically run by an Asset Management Company, that gathers a group of investors and invests their collected money. It is a type of business where the collected money from a lot of individuals is invested in stocks, bonds, and other types of short-term debt. The agent, or AMC, purchases shares in the stock market on behalf of owners of mutual funds. And in return, every shareholder gets a portion of the amount as a profit, which is produced by his invested funds.

Fund managers, who have knowledge and experience in analyzing and managing investments, are responsible for managing mutual funds. According to the objective of mutual fund investment, the money received from investors is invested in various financial assets, including stocks, bonds, and other assets. The fund manager is in charge of several tasks, including identifying where and when to invest.

The mutual fund business in India has been supported by SEBI (Securities and Exchange Board of India), the country’s capital markets regulator, by developing a structure that benefits all parties involved, including investors and mutual fund sponsors. Periodically, new regulations are passed that enhance performance, draw in investment, and foster expansion.

What is a Lock-in Period in Mutual Funds?

The lock-in period is the duration for which the investment or the invested money cannot be sold, redeemed, or withdrawn. There are mainly two types of investment schemes in reference to lock-in periods:

  • Open-ended schemes: If any investment is made under this type of scheme, the investors do not have any lock-in period, which means they can redeem or exit from the investment whenever they feel the need.
  • Closed-ended schemes: Closed-ended investments have a lock-in duration of three to five years. This means that you are unable to withdraw funds from these plans before the completion of the lock-in.

By “lock-in period,” we mean that investors are unable to withdraw their investment units before a specific date. During the mutual fund lock-in period, the investor is not permitted to totally or partially withdraw or redeem the deposited amount or the assigned units. Closed funds are mutual funds with a lock-in period.

A lock-in period of three years is typically included with close-ended mutual funds. While the Equity-Linked Saving Scheme (ELSS) has a lock-in period that is applicable to both SIP and lump-sum investments, While you must pay an exit load in order to sell the other open-ended mutual funds within a year that has no lock-in period,

The investment term of a fund or investment 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, some mutual funds, etc. frequently have lock-in periods. But the lock-in period is not the only time that investors should wait to withdraw their money. When the lock-in period is over, they must assess the fund’s performance and choose whether to keep the money invested or redeem it.

The Importance Of The Lock-in Period in Mutual Funds

The lock-in period of a mutual fund is important for preventing investors from trading units at the last minute. Sticking with a mutual fund investment for a longer time allows investors to reap the greatest rewards.

The stabilization of mutual funds is also essential. Otherwise, frequent changes to the fund’s unit size or composition could have an impact on returns. Because of the hasty selling within a short period of time, this may also cause liquidity problems.

To keep their clients for an extended length of time and to prevent too frequent sales and redemptions of the funds, mutual fund houses set a certain lock-in term. In order to receive maximum benefit from equity investments and have a duty to hold onto their investments for the long term, this is in their best interest.

Advantages of Investing in Mutual Funds

Liquidity, or the simplicity with which an investor can change his units into cash, is one of the main benefits of mutual funds. The Securities and Exchange Board of India (SEBI), which oversees mutual funds, has well-defined rules to guarantee liquidity. Liquidity is a key component of open-end systems, which make up the vast majority of schemes. Accessibility is made simple, or an asset can be easily turned into cash.

Within three business days of lodging the redemption, money is transferred to the investor’s selected bank account when the redemption is completed. The straightforward liquidity provided by mutual funds is one of their main benefits. 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 simplicity of redeeming mutual fund assets, there are a few things to consider to make sure you get the most value from the investment.

How Can Mutual Funds Be Redeemed Before The Lock-in Period?

A three-year lock-in period is required for Equity-Linked Savings Schemes or ELSS funds. This is an awesome choice for investment plans to save taxes. ELSS has the shortest lock-in time among all tax-free investment choices. Lock-in periods are very important because they enable investors to protect their savings.

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 there is a lock-in period of 3 years from the date of investment.

Any applicable exit load on an investment must be considered by investors. Exit loads are costs deducted at the time of redemption. In order to discourage speculative or short-term investors from participating in a scheme, AMCs typically charge an exit load.

This is not available with closed-end schemes because all units are automatically redeemed on the date of maturity. Closed-end plan units, however, are listed on a reputable stock exchange, and investors can sell their units only after the completion of the lock-in period.

Mutual Funds with a Lock-in Period can often be redeemed at any moment in the case of open-ended schemes. Some mutual fund programs, such as the ELSS (Equity Linked Savings Scheme), have redemption restrictions that last for three years from the program’s commencement date.

While buying a mutual fund scheme you might have heard the terms “entry loads” and “exit loads”. The Mutual Fund charges these fees as transaction costs when you buy or “enter” a scheme and when you sell or “exit” a scheme.

If you plan to withdraw money from your account earlier than expected, you can do so only after paying the appropriate penalty.

Particularly, exit loads are assessed when mutual funds are redeemed before the allotted time. Therefore, if an early withdrawal request is made, these exit loads—which are typically 1%—should be carefully evaluated to prevent your net earnings from being negatively impacted by the fund managers’ fees.

There are a few different ways an investor can take money out of Mutual Funds:

  • Utilizing AMC: The firms that are involved in an asset management business are known as Asset Management Companies (AMC). They collect investors’ funds and distribute them across many Mutual Fund schemes in accordance with an internal research matrix. You can request the redemption of your Mutual Fund by contacting the AMC or by transferring funds directly to the agent as an investor. You can also complete this process using the AMC or transfer funds to the agent’s official website if it offers an online option.
  • Through a trading or Demat account: By entering your DEMAT account and selecting the number of units you want to sell, you may submit an application for the redemption of funds if you have a DEMAT account.
  • Using a distributor or agent: You can get in touch with these representatives if a portfolio manager or fund manager is looking after your investments. On your behalf, he can carry out the entire redemption process.
  • On your own: To redeem or withdraw your mutual funds whenever it’s convenient for you, you might also use app-based investment services like Fisdom. These platforms focus on investments and also on redemption procedures.

Conclusion

Before making a choice of Mutual Funds, carefully evaluate their withdrawal procedures. It is advisable to keep your money invested if you do not have a compelling reason to withdraw it. Market volatility can occasionally be frightening. An investor should always exercise patience under these circumstances and think about keeping their investment to gain in the long run.

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