Lock-in

A lock-in is a rule that stops an investor withdrawing money before a set date. Many products use one. PMS in India expressly does not. The workbook states it in one line: "Portfolio managers cannot impose a lock-in on the investment of their clients."

That does not mean an early exit is free. A portfolio manager can still charge an exit load, a fee for withdrawing early, as long as it stays within SEBI's prescribed limits and is disclosed in the client agreement. The client's money is never trapped; it can simply cost something to take out early.

No lock-in, but a graded exit load (Chapter 7, section 7.5.2, per the PMS Circular dated 13 February 2020). When a client's portfolio is redeemed in part or in full, the exit load charged is capped at:

The agreement must state the terms. The agreement between the client and the portfolio manager must include the terms for early withdrawal, along with the withdrawal fee expressed both as a percentage and as an amount.

So the client can always leave. What changes with time is only how much an early exit costs, and after three years, nothing at all.

Anjali invests ₹80,00,000 in a discretionary PMS on 1 April. She needs the funds back for an emergency 8 months later, still within the first year.

Because there is no lock-in, the portfolio manager cannot refuse or delay her withdrawal on the ground that her money must stay invested for a minimum period. But because she is redeeming within the first year, the manager may charge an exit load of up to 3%.

If her portfolio has grown to ₹86,00,000 by the redemption date, the maximum exit load is 3% of ₹86,00,000, or ₹2,58,000, leaving her with at least ₹83,42,000.

Had she waited until the fourth year to redeem the same amount, no exit load at all could be charged. She would receive the full redemption value, whatever it had grown to by then.

Chapter 7 (Role of Portfolio Managers), section 7.5.2 (Circumstances leading to pre-mature withdrawal of funds), states the no-lock-in rule and the SEBI exit load schedule together. Expect a direct recall question on whether PMS can carry a lock-in (no), and a calculation question applying the 3%, 2%, 1%, nil exit load schedule to a redemption amount and holding period.

• No lock-in does not mean no cost to exit early. The exit load schedule still applies.
• The exit load percentages are maximums, tapering to zero after three years: 3% in year 1, 2% in year 2, 1% in year 3, nil after.
• The exit load is charged on the amount redeemed, not on the original investment or on profit alone.
• The withdrawal fee terms must be in the agreement, in both percentage and rupee terms. This is a documented, disclosed cost, not a discretionary charge decided at the time of exit.