What is a Lock-in Period? Meaning, Purpose, Benefits & Complete Guide

A lock-in period is the fixed time during which you cannot withdraw, redeem, or sell your investment. It is common in mutual funds, fixed deposits, and certain tax-saving schemes.

Think of it like a prepaid one-year gym membership you can use the facilities but cannot get your money back before the year ends. Similarly, with investments, your money stays locked until this period ends. This helps you stay committed and avoid short-term trading.

Below is a table showing how different investments grow during their lock-in periods:
 

This table clearly shows that during the lock-in period, you cannot access your invested amount, but it continues to grow, rewarding your patience once the period ends.

In this blog, we will explain how a lock-in period works, why it exists, and how it impacts your returns using a simple example.

Lock-in Periods in Different Mutual Funds 

Not all mutual funds lock your money for a set time. Some do, some don’t. A lock-in period means you cannot take your money out until a fixed time is over. Let’s look at the types of mutual funds and see what rules they have.
 

Knowing the lock-in period helps you choose the right mutual fund whether you want to commit your money for a few years for tax savings or keep it free for quick access.
 

• Only ELSS equity funds lock your money for 3 years
  .
• Debt and hybrid funds let you take money out anytime.
   

If you want, I can now make this with tax rules in the same table but still keep it extremely simple. That way it covers both lock-in and tax in one place.

Lock-in Periods in Different Investments

A lock-in period means you must keep your money in an investment for a set time before you can take it out. Different investments have different lock-in rules. Let’s break them down in a simple way:
 

• Mutual Funds: Most closed-ended mutual funds lock your money for 3 years. ELSS mutual funds are the only open-ended ones with a 3-year lock-in. You can invest in them through SIP or in one go, and they also help you save tax.
   
• Tax-Saving Fixed Deposits: These keep your money locked for 5 years. You can’t withdraw early without a penalty.
   
• Government Bonds: The lock-in varies. For example, NSC locks your money for 5 years, while PPF locks it for 15 years.
   
• ULIP Funds: These keep your money invested for 5 years to help you earn market-linked returns.

Each investment type has its own lock-in time, so always check before investing to match it with your needs.

Why a Lock-in Period Matters?

A lock-in period is important because it helps both investors and fund managers in several ways:
 

1. Encourages Long-Term Saving:
   It stops people from taking money out too soon. This means your money has more time to grow, just like a tree needs years to become big and strong.
    
2. Gives Tax Benefits:
   In some investments, like ELSS, you can save on taxes if you keep your money locked in for the required time. It’s like getting a reward for being patient.
    
3. Keeps Funds Stable:
   Fund managers can plan better when they know the money will stay for a certain period. This helps them invest in a way that benefits everyone.

A lock-in period is like a safe box for your money it keeps it untouched so it can grow, give you rewards, and stay steady for the long run.

What to Do After Your Lock-in Period Ends? 

When the lock-in period ends, you get full control of your money. Here’s what you can do in simple terms:
 

When the lock-in ends, you can move, grow, or protect your money in the way that suits you best.

Conclusion

A lock-in period keeps your money invested for a set time, helping you stay committed and avoid early withdrawals. It supports long-term growth, offers possible tax benefits, and ensures stability in your investments. By understanding the lock-in rules, you can choose investments that match your goals and risk level. In the end, patience during this period often leads to better financial rewards.

FAQ’s

Can I take my money out during the lock-in period?
No, you cannot withdraw your money before the lock-in period ends.
 

Do all investments have a lock-in period?
No, only certain investments like ELSS, tax-saving FDs, and ULIPs have lock-in rules.
 

Why do investments have a lock-in period?
It encourages long-term investing, offers possible tax benefits, and gives fund managers stability.
 

Does the lock-in period affect my returns?
Yes, your money stays invested longer, which can help it grow more over time.
 

Can I extend the lock-in period?
Yes, in some investments you can reinvest or renew after the lock-in period ends.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.