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Market Intelligence › Basic Terminologies
Concept of Illiquidity Premium, and when is it applicable?
Published by The Retail Trader · AUG 08, 2026 · AIF, PE & Alternates
Some products promise high returns and in return lock your money for a few years. There is a name for our extra return, and it should also be accounted for.
The investor of the asset which cannot be sold easily should get compensation for his loss. This extra expected return is called illiquidity premium.
This concept is correct, but it is also misused a lot – not every lock-in comes with a premium, and not every premium promise is genuine.
These four questions are asked at every lock-in:
• Whether you want to pay that money in us duration or not.
• What is the extra return, and how much is it more than a comparable liquid option.
• In an emergency, is there any way to exit or none at all.
• Is lock-in for your benefit or just for the stability of the product.
A small lock-in is sometimes good for behavior — it prevents you from selling on a bad day. But that benefit is saved only when the rest of the portfolio is so liquid that you do not need the locked portion in an emergency.
This article is for educational purposes only. It is not a buy or sell recommendation, a claim of guaranteed returns, or advisory guidance. Exchanges, SEBI and RBI change rules, rates and procedures from time to time, so verify every figure with your broker or an official source.