Lock-in Period In Investments: Meaning, Benefits And Timelines (2025)
The lock-up or lock-in period is a timeout for your investments when you can not sell or cash them out. It is a mandatory waiting period for assets such as hedge funds, initial public offerings (IPOs), some startup investments, and ELSS (tax-saving) funds.
Understanding what is lock-in period helps investors make more informed decisions.
This blog discusses the lock-in period for various asset classes, focusing on tax-saving ELSS, their significance, and the actions to take once the lock-in period concludes.
What Is Lock-in Period ?
A lock-in period is a specified period of time that prohibits investors from selling or withdrawing their investments. Lock-in periods are often used in different financial instruments to protect against volatility caused by investors exiting a stable investment item. It helps in incentivizing long-term holding of investments. It can be in numerous instruments like mutual funds, IPOs, tax benefits, fixed deposits, etc.
When a company sells shares to the public through an Initial Public Offering (IPO). The promoters are usually under a lock-in period when they cannot sell their shares for a period after they begin trading publicly. The lock-in period is implemented to avoid a large sell-off of shares on the public market, which could negatively impact the stock price.
The lock-in helps ensure that the market determines the intrinsic value of the company's stock. For those investors examining diversity within lower-risk instruments, fixed-income mutual funds can provide the experience of reasonably consistent returns with less volatility.
Types Of Lock-In Periods
Understanding the different types of lock-in period helps investors make a more informed decision. Below are some common types of lock-in periods:
1. IPO Lock-in Period
When a company goes public through an Initial Public Offering. The promoters and certain shareholders are subject to a lock-in period of typically 1 year for promoters and 6 months for anchor investors as per SEBI rules. It prevents reckless mass selling and provides price stabilization during the initial trading period of a company.
2. Fixed Deposits
Tax-saving Fixed Deposits under Section 80C of the Income Tax Act, 1961 have a mandatory 5-year lock-in period. They are not permitted to be withdrawn prematurely or taken out as a loan against the FD. It makes them a great option for conservative investors. It is perfect if you want to reduce your tax burden and also protect your capital.
3. Employee Stock Option Plans
Companies often apply a lock-in or vesting period on ESOPs, generally lasting from 1 to 4 years. The employee must stay with the business for the duration of the vesting period to acquire ownership of the shares granted. It is an effective program to keep talent and align the employees' interests with the performance and sustainability of the company.
4. Mutual Fund Lock-in Period
The mutual fund lock-in period keeps the fund steady and balanced. It also lets investors grow their money over time and enjoy the perks of long-term investing. Let us take ELSS mutual funds as an example. They have a lock-in period of 3 years and provide great returns. Even through investing via SIPs, there is a separate SIP lock-in period, helping to continue wealth creation. You can get more flexible options with debt mutual funds, which have moderate risk levels and better liquidity.
Lock-in Periods vs. No Lock-in Investments
Understanding the distinction between lock-in investments and non-lock-in investments is very important. Below is a comparison of the two:
Factor | Lock-in Investments | No Lock-in Investments |
Liquidity | Lock-in investments restrict access to funds until their required periods expire. | No lock-in investments provide easy access to an investor's funds. |
Return Potential | These investments may provide higher potential returns driven by the compounding effect over a longer tenure due to having fewer exits. | They have the opportunity to have lower returns because investors can redeem them early, creating maximum limits to growth. |
Tax Benefits | Lock-in investments may provide tax savings under section 80C of the Income Tax Act to prompt saving behavior. | These investments usually do not allow tax savings, meaning they also don't provide a limiting factor on tax, offering less incentive to save for investors. |
Investor Discipline | These may enable a more disciplined investing approach by saving investors from the impulse to redeem the funds during market volatility. | These may promote varying behavior due to flexibility, creating more opportunities for redemption that diminish long-term gains. |
Example | Examples of lock-in investments include ELSS mutual funds (3 years), PPF (15 years), and tax-saving FDs (5 years). | Examples of no lock-in investments are liquid funds, savings accounts, and regular FDs. |
Why Is The Lock-in Period Important?
1. Lock-in periods act like a set arrangement for fund managers, preventing rushed choices from investors who may get nervous during market ups and downs.
2. New investors might withdraw funds impulsively. The lock-in period ensures the money stays put for at least a defined period and markets remain more stable.
3. Hedge fund managers appreciate the time provided by lock-in periods to exit investments, preventing sudden or frequent withdrawals that could disrupt the overall portfolio balance.
4. Since anchor investors might easily cash out as soon as a stock list to take advantage of listing gains, many market analysts think lock-in periods are essential. The lock-in period benefits the firm and its investors by stabilising the share price immediately following an initial public offering.
5. Lock-in periods in mutual funds guarantee steadiness by preventing excessive redemption, which can result in liquidity issues.
Mutual Fund Lock-in Period
The lock-in period for a mutual fund keeps the fund steady and balanced. It also lets investors grow their money over time and enjoy the perks of long-term investing. Let us take ELSS mutual funds as an example. They have a lock-in period of 3 years and provide great returns.
How Lock-in Periods Affect Liquidity And Returns
Lock-in conditions greatly influence the potential liquidity and return on an investment. Although lock-in constraints limit the number of times an investor can access funds for a set period of time.
1. It limits liquidity and access to funds for the length of the lock-in period. This reduces the financial flexibility associated with the investments.
2. Lock-in conditions often produce higher returns because of the effects of compounding and reduced pressure to redeem.
3. The provisions discourage hasty withdrawals from an approach to investing that might arise if an investor reacts to market fluctuations and subsequent emotional responses.
4. Lock-in provisions apply to many investment instruments to offer the benefit of tap-saving and further enhance the investor's post-tax return.
What To Do After The Lock-in Period Ends ?
After the lock-in period expires, investors can follow the approach mentioned below:
1. Investment Or Fund Performance Review
Evaluate how your investments have been doing. Let us say you invested in tax-saving ELSS funds with an ELSS lock-in period and the potential for long-term returns. Post-lock-in, your mutual funds become open-ended, i.e., you can withdraw anytime. You have two choices now. You can remain invested in the same fund and reap long-term returns based on the fund’s past performance or move your money to another tax-saving scheme that better fits your investment goals.
2. Redeem The Units Of Your Investment
If you decide to divest your ELSS fund, you can simply redeem your units or switch to another fund online or offline.
What To Do After The Lock-in Period Ends ?
After the lock-in period expires, investors can follow the approach mentioned below:
1. Investment Or Fund Performance Review
Evaluate how your investments have been doing. Let us say you invested in tax-saving ELSS funds with an ELSS lock-in period and the potential for long-term returns. Post-lock-in, your mutual funds become open-ended, i.e., you can withdraw anytime. You have two choices now. You can remain invested in the same fund and reap long-term returns based on the fund’s past performance or move your money to another tax-saving scheme that better fits your investment goals.
2. Redeem The Units Of Your Investment
If you decide to divest your ELSS fund, you can simply redeem your units or switch to another fund online or offline.
Lock In Period Of Tax Saving Investment Schemes
According to the Income Tax Act Section 80C, various tax-saving investments with lock-in are ELSS funds, Public Provident Funds, Tax Saving FD, National Saving Certificates, and NPS.
The lock-in period of these assets is as follows:
Scheme Name | Lock-In Period |
Tax Saving FD | 5 Years |
PPF | 15 Years |
NPS | Till 60 years |
NSC | 5 Years |
The lock-in period for tax-saving instruments is usually longer, and investors are rewarded with lower tax rates after the lock-in expires.
Lock-in Period For Other Non-Tax-Saving Investments
The lock-in period of these assets is as follows:
Scheme | Lock-In Period |
IPO | *90 + 30 days for anchor investors |
Hedge Funds | 30 to 90 days |
Unit Linked Insurance Plans (ULIPs) | 5 years |
Fixed Deposits | 7 days to 10 years |
*The Indian stock market employs the following lock-in periods, as outlined by SEBI regulations:
- 50% of the shares allocated to the anchor investors are subject to a 90-day lock-in period beginning on the allotment day, followed by another 30-day lock-in period for the remaining 50%.
- For promoters, the lock-in period is 18 months for allotment up to 20% of the post-issue paid-up capital. Allotments above 20% of the post-issue paid-up capital are subject to a 6-month lock-in obligation.
- The lock-in time for non-promoters is now 6 months instead of 1 year.
Looking for stable investment options beyond IPO lock-ins?
Conclusion
A lockup period is not just about limiting the sale of investments; it is an opportunity for investors to nurture their financial growth. Knowing the lock-in duration allows you to better plan for liquidity and cashflows for your total portfolio. For more informative investment guides and exploration opportunities, follow Grip Invest.
Frequently Asked Questions On Lock-in Period
1. What are the benefits of the lock-in period?
The lock-in period has many benefits, such as commitment, promoting long-term investing, discouraging impulsive exits, and ensuring wealth generation.
2. What are the lock-in period disadvantages?
The lock-in period restricts investors from changing their investments in case of emergency fund requirements.
3. Is the lock-in period legal in India?
Yes, the lock-in period is legal in India.
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