Lock-in
Also written PMS lock-in
A minimum holding period before withdrawal, expressly barred in PMS: a portfolio manager cannot force a client to keep funds invested, though a graded exit load may still apply.
In plain language
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.
How it works
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:
| Time since investment | Maximum exit load |
|---|---|
| First year | 3% of the amount redeemed |
| Second year | 2% of the amount redeemed |
| Third year | 1% of the amount redeemed |
| After 3 years | Nil |
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.
A worked example
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Check yourself
1.A PMS agreement proposes a one-year lock-in followed by a 2% exit load in the second year. Which part is not permitted?
- a)The 2% exit load in the second year
- b)The one-year lock-in
- c)Both parts
- d)Neither part
Show the answer
Answer: (b) The one-year lock-in
Portfolio managers cannot impose a lock-in on client investments.
A 2% exit load in the second year is exactly the permitted maximum under the 13 February 2020 circular (3% / 2% / 1% / nil). So only the lock-in breaks the rules.
2.Which statement about premature withdrawal from a PMS is correct?
- a)Clients cannot withdraw funds or securities before the maturity of the contract
- b)Withdrawal fees need to be stated only as a percentage
- c)The portfolio manager may impose a lock-in of six months
- d)The agreement should include the terms for early withdrawal, with withdrawal fees stated in percentage as well as amount
Show the answer
Answer: (d) The agreement should include the terms for early withdrawal, with withdrawal fees stated in percentage as well as amount
The workbook says “funds or securities can be withdrawn … by the client before the maturity of the contract”, on terms in the agreement. The agreement “should include the terms for early withdrawal … It should also include the withdrawal fees in terms of percentage as well as the amount.”
So withdrawal before maturity is allowed, a percentage alone is not enough, and “Portfolio managers cannot impose a lock-in” of any length.
3.Farida joins a PMS by transferring listed shares worth ₹52 lakh on the on-boarding date. Which statement is correct?
- a)The portfolio manager must hold the shares unchanged for at least one year
- b)The shares must first be sold by Farida and the cash brought in
- c)The portfolio manager may sell all or part of the shares to meet her investment objectives within the investment approach
- d)The shares count only at 50% of their value towards the minimum investment
Show the answer
Answer: (c) The portfolio manager may sell all or part of the shares to meet her investment objectives within the investment approach
Investment can be “in cash or in securities or a combination of the two worth minimum Rs. 50 lacs”, with the valuation of the securities on the on-boarding date meeting the regulatory criteria. Then: “The portfolio manager may execute the sale of all or part of such securities to meet the investment objectives of the client within the investment approach.”
There is no lock-in on transferred shares, no need for Farida to sell them first, and no haircut — the workbook values them on the on-boarding date. At ₹52 lakh she meets the ₹50 lakh floor.
Where this is taught
Free preparation for NISM Series XXI-ARelated terms
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
- Disclosure DocumentThe document a portfolio manager must give every prospective client with the account opening form, before the agreement is signed, and keep on its website — setting out the manager, services, risks, fees and performance.