An interval fund is a type of mutual fund where you can only buy or sell your investment at specific times. This time period is mostly decided in advance by the fund. This way, interval funds are different from regular mutual funds that allow daily transactions.
Moreover, interval funds often invest in both stocks (equities) and bonds (debt securities). However, they usually focus more on bonds or other debt instruments.
In this article we’ll learn about what are interval funds, key pointes to remember before investing in interval mutual funds, how they work and much more.
What are interval funds?
Interval mutual funds refer to a unique category within the investment landscape. They carve a unique niche by blending features of both open-end and closed-end funds. Unlike their conventional counterparts, interval funds characterised by the flexibility of allowing investors to purchase and redeem units specifically during designated transaction periods, known as intervals.
This offers a middle ground that combines flexibility with active portfolio management. The intervals during which investors can buy or sell units are formally announced by the fund house. Notably, these intervals must span a minimum of 2 days, with a mandatory 15-day gap between two consecutive transaction periods. This is similar to closed-ended funds, restricting the frequent purchase or redemption of units.
Adding an additional layer of distinction, the units of interval schemes are obligated to be listed on stock exchanges. This listing requirement sets interval mutual funds apart, contributing to their distinctive nature within the mutual fund spectrum. In essence, investors engaging with interval mutual funds navigate a structured framework where the ability to transact is limited to predetermined time windows, fostering a dynamic and regulated investment environment.
How do interval mutual funds work?
Interval Funds represent a mix of characteristics found in both open-ended and closed-ended funds. Within the specified intervals determined by the fund house, investors can engage in buying or selling units at the prevailing Net Asset Value (NAV).
The distinctive feature of interval funds lies in the predetermined intervals set by the fund house for the redemption of units. This unique structure grants the fund manager an advantage to craft a robust investment strategy. Without the burden of regular redemption requests and worries about liquidity, the fund manager has more leeway to move through the market. This increased flexibility improves the chances for strategic and informed investment choices.
Features of an interval fund
- Interval purchase and redemption: Unlike traditional mutual funds, investors can only buy and sell units of interval funds during specific windows predetermined by the fund house. This allows the fund manager to focus on a long-term investment strategy without worrying about redemptions.
- Investment strategy: Interval funds tend to invest in less volatile assets like commercial property and debt instruments, making them suitable for investors with a low-risk tolerance and short-term investment goals.
- Liquidity: Due to the limited windows for buying and selling units, interval funds are considered to be highly illiquid.
Benefits of interval funds
- Potential for higher returns: Interval funds may offer returns that outperform traditional open-ended mutual funds due to their ability to invest in assets that are typically less liquid and have the potential for higher yields.
- Access to alternative investments: Interval funds can provide retail investors with exposure to institutional-grade alternative investments, such as private debt or real estate, with lower minimum investment amounts compared to directly investing in these assets.
- Periodic redemption opportunities: While redemptions in interval funds are limited to specific windows, some funds may offer periodic buyback programs where they repurchase shares from investors at the net asset value (NAV). This provides a chance to exit the investment even outside the designated trading windows, though at the fund's discretion.
Key points to remember about Interval Funds
Illiquidity and redemption constraints:
- Units of interval funds can only be redeemed during specific intervals, making them highly illiquid.
- No ability to redeem units during emergencies, even with a willingness to pay the exit load.
- Absence of a secondary market for selling units.
Investment Alignment with Horizon:
- Suitable for investors aligning their investment horizon with the maturity date of the interval fund.
- Most interval funds, predominantly debt-oriented, cater to individuals with lower risk tolerance.
- Returns generally fall within the range of 6-8% over a five-year duration, diminishing for shorter timeframes.
Tax Implications Based on Asset Allocation:
- Taxation rules hinge on the percentage of equity and debt investments within the fund.
- If the fund invests 65% or more in equity, it is treated as an equity fund for tax purposes.
- Conversely, if at least 65% is invested in debt instruments, it is treated as a debt fund, impacting tax rates accordingly.
Who should Invest in Interval Funds?
Interval funds carve a distinctive niche in the investment landscape by venturing into illiquid assets listed on the traditional exchanges. These assets, ranging from private holdings to commercial properties, and business loans, set interval funds apart. For investors seeking exposure to these unconventional avenues, interval funds present an intriguing opportunity.
These funds cater to individuals with an appetite for diversification beyond the commonly traded securities. The illiquid nature of the assets within interval funds poses a unique appeal, as it allows fund managers to explore opportunities not readily available in more conventional investment vehicles.
Interval funds, with their focus on non-exchange-listed assets, provide a chance for investors to participate in sectors often overlooked. Those with a keen interest in alternative investments and a willingness to navigate the challenges of illiquidity may find interval funds to be a compelling addition to their investment portfolio.
List of low risk mutual funds
- Canara Robeco Bluechip Equity Fund
- ICICI Prudential Value Discovery Fund
- Kotak Bluechip Fund
- Nippon India Large Cap Fund
- HDFC Index Fund-NIFTY 50 Plan
- ICICI Prudential Nifty 50 Index Fund
- UTI Nifty 50 Index Fund
- Aditya Birla Sun Life Liquid Fund
- HDFC Liquid Fund
- ICICI Prudential Liquid Fund
Things to consider as an investor
Interval funds are unique mutual funds with specific buying and selling windows. These funds mostly invest in debt securities. While they can be appealing for certain investment goals, they come with specific risks and benefits that investors need to understand before committing their money. Let’s check out some of the most important things to consider while investing:
Risk
Interval funds are highly illiquid, and you cannot easily convert them into cash during emergencies. You can only redeem your investment during the specified windows. Also, there are no secondary markets to sell your units. It is worth mentioning that even if you are willing to pay an exit load (a fee for withdrawing early), you still can’t exit outside these pre-decided periods.
Returns
Most interval funds offer modest returns. In India, the annualised returns over five years range from 6% to 8.5%. These returns might seem reasonable over a long period, but they are relatively low when you break them down into shorter time frames. This effect is felt even more when you compare the returns of interval funds to other types of mutual funds.
Generally, interval funds offer lower returns and are less appealing to investors looking to grow their investments significantly over time. High-growth investors usually prefer mutual funds that have the potential for higher returns, even if they come with higher risk.
Investment horizon
Interval funds are best suited for short-term goals that align with your redemption periods. This way, you can match the specific times when you can redeem your investment. For example, say you know you will need a certain amount of money in a few months. Now, if your financial need matches the fund's redemption period, interval funds can give you a reasonable return during that time.
However, it is crucial to have clear financial goals so that when the fund allows you to withdraw your money, you are ready to use the lump sum.
Financial goals
Be aware that interval funds are primarily fixed-income investments. Therefore, they are usually considered ideal for conservative investors who are unsure about their investment duration. These funds are also good for those who need a lump sum at a specific future date.
Furthermore, due to their focus on debt instruments, they offer lower returns but come with reduced risk. This makes them suitable for investors with a low-risk tolerance.
Also read: What is mutual fund
Key takeaways
- An interval fund is a closed-end fund. It has a fixed number of shares that do not trade on the open market. Instead, these shares can only be purchased or sold back to the fund during specific periods.
- Interval funds buy back a portion of their outstanding shares at the current net asset value (NAV). However, since repurchases are done on a pro-rata basis, there's no guarantee that you will be able to sell all the shares you want during a redemption period.
- Even though interval fund shares aren’t traded on the open market, the fund itself offers to sell shares daily at the current net asset value (NAV). This means you can buy shares from the fund on any business day but only sell them back during the specified intervals.
- The minimum investment required for an interval fund is usually high. Additionally, these funds have high expense ratios, which can be as much as 3% of your investment. This makes them more costly to hold compared to other types of mutual funds.
- Interval funds generally offer higher returns than open-end mutual funds because they can invest in a broader range of assets, including less liquid or alternative investments. This flexibility allows them to achieve higher yields. However, at the same time, this increases risk and complexity.
Also read: What is CAGR
Conclusion
Interval funds unveils a distinctive avenue for investors seeking a nuanced approach to wealth creation. By embracing the unique feature of limited redemption windows, investors can navigate a landscape that includes private assets, commercial properties, and business loans.
For those with an appetite for risk and a desire to invest into non-traditional investments, interval funds offer an intriguing opportunity. The illiquidity that characterises these funds provides fund managers the flexibility to pursue strategies that may not be feasible in more liquid environments. While interval funds may not be suitable for every investor, they cater to those who seek exposure to a spectrum of assets beyond the ordinary.
As we conclude this exploration, it becomes evident that interval funds occupy a distinctive niche when we talk about mutual funds in India, appealing to individuals willing to embrace the challenges of illiquidity in exchange for potential opportunities in uncharted territories.
