What is a blocking period?
As the name suggests, your investment is locked for a fixed period during which you cannot access your money. For example, in IPOs, the lock-up period for lead investors is 30 days and therefore they cannot sell the stake in the company until 30 days after listing.
There are three types of mutual funds. These are closed-end mutual funds, open-end mutual funds, and interval funds. Closed-end mutual funds have a minimum holding period of three to five years. Like Equity Linked Savings Scheme has a lock-up period of three years. Most other mutual funds do not have a lock-up period.
In IPOs, the lock-up period for referral investors is 30 days. Anchor investors get a guaranteed allocation one day before the IPO opens to the public. They normally receive 60% of the qualified institutional buyers quota.
Hedge funds, which cater to high net worth individuals and institutional investors, typically have a lock-up period of 30 to 90 days.
Tax-saving term deposits have a lock-up period of five years. It allows you to make an investment to save tax under Section 80C of the Income Tax Act.
Under Unit Linked Insurance Plan or ULIP, you not only meet your long-term goals through periodic investments, but you also benefit from the insurance. It has a minimum retention period of five years.
Why is the blocking period necessary?
Lock-up periods are put in place to ensure that investors stay invested and do not panic in the face of volatile market movements. This helps longer-term investors. For IPOs, the lock-up period prevents anchor investors or private equity firms from selling the stake immediately after listing and thus prevents share price volatility. For mutual funds, lock-up periods help maintain liquidity and stability of the fund.