Why some investors want their money locked away for long-term wealth

Closed-end mutual fund schemes have a fixed maturity date and cannot ordinarily be redeemed before then. The regulator should consider allowing fresh investments in them until maturi

Our domestic staff, Shankar, had been with us for many years. When his daughter was born, he said, “I want her to be able to study whatever she wants, without money coming in the way. Please deduct ₹2,000 from my salary every month and invest it for her education. Do not give it back to me, even if I ask, until she turns 18.”  

Shankar was describing the product he needed: an automatic monthly investment before the money reached his bank account, long-term growth and a lock-in until the investments were needed. 

People with limited financial resources often value two forms of protection: saving before the money reaches them and restricting access to it afterwards. Otherwise, emergencies, family obligations and immediate spending can steadily erode their savings. The middle class faces a milder version of the same problem and benefits from the same protections. Automatic saving turns a monthly decision into a one-time choice; a lock-in protects the accumulated amount thereafter. 

India has already seen how powerful this combination can be. The Employees’ Provident Fund Organisation (EPFO) has nearly eight crore subscribers and assets of about ₹28 lakh crore. Contributions are deducted from salaries, matched by employers and remitted to EPFO. They remain largely locked in until retirement. The corpus would have been far smaller if employees had first received the money and then had to invest it every month, or could easily withdraw it before retirement. 

EPFO achieved this scale not only through automatic contributions and the lock-in of accumulated savings, but also through compulsory enrolment and high contribution levels. Its experience therefore offers two different lessons. Automatic saving and lock-in are powerful tools for building and preserving savings. But compulsory enrolment can turn the same lock-in from protection into a trap, especially when poor administration makes legitimate withdrawals difficult and limited investment choices reduce returns. 

That structure is now changing because the required contributions from employers and employees have been reduced to ₹1,800 a month each. Employees may contribute more, but employers need not match the additional contribution. Money once diverted automatically into the Employees’ Provident Fund (EPF) may now reach employees as salary. They may spend this additional cash or direct it into other savings. 

One option for employees who want to continue saving for retirement is the National Pension System (NPS). It offers voluntary enrolment, automatic salary deduction, lock-in and investment choice. But it does not solve Shankar’s problem: he needed the same combination for his daughter’s education. 

A voluntary “goal-maturity mutual fund” could let investors like Shankar choose a maturity date, invest automatically every month and redeem only after that date. It could offer the investment choices and low costs of mutual funds, with contributions deducted from salary before reaching the bank account. 

Much of this structure already exists. Closed-end mutual fund schemes have a fixed maturity date and cannot ordinarily be redeemed before then. Currently, they cannot accept fresh subscriptions after the initial offer closes. The regulator should consider changing this to allow fresh investments to continue until maturity. Investors who need the money earlier can still sell the units on an exchange through a demat and broking account. This deliberately inelegant exit preserves emergency liquidity without making the savings easy to spend. 

Truth be told, I could not find a product for Shankar that combined 100 per cent equity investment, automatic saving and a meaningful lock-in. So I arranged a systematic investment plan (SIP) in an equity fund timed to his salary date. He did not know how to withdraw the money without my help and asked me to remind him of his original decision if he sought the money early. His dependence on me became a jugaad substitute for the lock-in the product lacked. Had a goal-maturity fund existed then, none of this would have been necessary. Shankar—and millions like him—could have chosen how much to save, when the money should become available and where it should be invested, and then left the product to carry out those choices. Enrolment would have been voluntary, the saving automatic and the lock-in real—not jugaad. 

 

 

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  The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta