Interval Funds

Interval funds combine the features of close-ended and open-ended funds.  The interval funds can only be bought or sold during a particular pre-determined window at periodic intervals.

Capital market regulator the Securities and Exchange Board of India (SEBI) categorises different types of mutual fund schemes based on the investment tenure and asset types they invest, among others. In the arena of mutual funds there are both open-ended and close-ended funds. There is one more category of mutual funds, through which the mutual fund houses offer the combined features. 

These funds are called interval funds. 

These mutual funds derive the name due to a typical feature associated with their buying or selling. What makes the interval funds different is that these funds can only be bought or sold during a particular pre-determined window at periodic intervals. 

Let’s delve into the details if you are looking for a new category of mutual funds. 

What are Interval Funds?

As the name suggests, an interval fund is a type of mutual fund whose units can be bought or sold only during a particular period. The window for buyback of these mutual funds units based on net asset value (NAV) is predetermined by the mutual fund house. The investors can invest interval funds at any time, but the redemption is allowed only during the specified transaction period (STP). 

Interval funds are mostly debt oriented schemes but they can invest in both debt and equity instruments.   

One of the advantages of interval funds is that the fund manager gets the opportunity and time to put in place a good investment strategy without getting worried about redemption requests and liquidity. This helps the fund house to determine the interval for unit redemption.  

How an interval fund works

The investors are allowed to buy or sell their units at the prevailing NAV only during the specified transaction period (STP), which opens in periodic intervals. Asset management companies (AMCs) decide the interval when investors can redeem their units.

Key Features of Interval Mutual Funds

• Thanks to their special design, interval funds could be a suitable short-term investment option.
• Interval funds offer higher liquidity as buying and selling units are allowed only during a specific window of time periodically.
• Interval funds normally suit investors with lower risk appetites.
• Interval funds generally invest in debt securities, minimising risks for investors.
• Even during any emergency, investors cannot redeem the units of their funds even if they are willing to pay the exit load.
• Investors need to be careful about the expense ratio as interval funds normally charge higher fees than other mutual funds.
• History shows that interval funds have given investors low to moderate returns of up to 8% over a period of 5 years.
• Taxation depends on the amount of investment in debt or equity.

Benefits of Interval Mutual Funds

Interval funds allow retail investors to gain exposure to unconventional assets. Asset management companies running such funds tend to invest in unconventional assets like commercial property, forestry tracts and business loans. Investors can put their money in institutional-grade alternative investments with low minimum investments. AMCs make periodic offers to investors to repurchase shares at prevailing NAV.

Who may find interval funds suitable?

As each mutual fund is designed with a specific focus to meet the particular investment needs of the investor, interval funds also focus on this aspect. These funds invest in commercial property, forestry tracts, business loans and other illiquid assets, which are suitable for investors who want to invest in unconventional assets. These funds are also suitable for short-term investors with low to moderate risk profiles.

Conclusion

Many investors compare interval funds with closed-ended funds, but the latter does not allow the investor to withdraw capital for a long period of time. Interval funds, however, allow investors to buy and sell during predefined windows. Interval funds also share features with a fixed maturity plan, so investors should keep in mind this positive aspect while investing.