Some mutual funds have a lock-in period, whereas others don’t. There are two ways to invest in mutual funds: SIPs (Systematic Investment Plans) and lump sums. SIP is a recurring investing method in which you contribute a predetermined amount on a regular basis, whereas lump sum is a one-time investment option. Both offer advantages that are tailored to individual investing goals and financial circumstances.
What Is a Mutual Fund’s Lock-in Period?
Interval funds, close-ended mutual funds, and open-ended mutual funds are the three types of mutual funds. Closed-ended mutual funds, for example, have a minimum lock-in term of three to five years. The fund’s entry and exit periods are restricted when the price per unit is lower than the regular price scale. The lock-in period prevents investors from feeling compelled to redeem their gains in the short term, allowing them to take advantage of potentially large profits.
In case of hedge fund, the lock-in period is designed to allow hedge fund managers time to leave investments that are illiquid or that might otherwise imbalance their portfolio of investments too quickly. Hedge fund lock-ups generally last 30-90 days, allowing the hedge fund management to leave assets without affecting the entire portfolio’s price.
Does It Work for different fund?
The lock-up time for funds is determined by the fund’s underlying investments. A long/short fund that invests mostly in liquid equities, for example, may have a one-month lock-up period. Event-driven or hedge funds, on the other hand, frequently invest in more thinly traded securities, such as troubled loans or other debt, and hence have longer lock-up periods. Depending on the nature of the fund’s investments, other hedge funds may have no lockup period at all. When the lock-up period is over, investors can redeem their shares on a specified timetable, which is usually quarterly. They usually have to give a 30- to 90-day notice so that the fund management may liquidate the underlying securities so that the investors can be paid.
The Significance of a Lock-In Period
- It will assist investors in sticking to their investment for a longer period of time and reaping the rewards of long-term investing.
- Lock-in periods are used in mutual funds to create stability while retaining liquidity.
- When it comes to deducting income from these assets from income tax, lock-in periods may be quite useful.
- The lock-in period allows hedge fund managers to leave assets that are illiquid or that would otherwise imbalance their portfolio of investments too quickly.
- The lock-in period is beneficial to start-ups and firms planning an IPO because it allows them to establish a robust business strategy and demonstrate market resiliency. The post-IPO lock-up period protects shares from being sold too soon after the IPO, when share values are artificially high and subject to significant price volatility.
- It’s a good idea to have a lock-in period for goal-based investments.
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