Interval Mutual Funds

An interval mutual fund is a type of investment company that periodically offers to repurchase its shares from shareholders.
Interval Mutual Funds
3 min
03-May-2024

Interval Funds have the flexibility to invest in either equity, debt instruments, or a combination of both. Investors can buy or sell units of these funds only at specific time periods, as determined by the fund house. This structure resembles closed-ended funds, restricting frequent purchase or redemption of units.

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.

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.

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Frequently asked questions

What is the interval scheme of mutual funds?

Interval schemes are a type of mutual fund where investors can buy or sell units only during specific intervals, set by the fund house.

What are the advantages of interval funds?

Advantages include potentially higher returns from less frequent trading, reduced liquidity pressure on fund managers, and greater flexibility in investment strategies.

Are interval funds risky?

Interval funds can carry risks associated with market fluctuations, illiquidity during non-trading periods, and potential limitations on accessing invested capital.

What is the duration of interval funds?

The duration varies depending on the specific intervals set by the fund house, typically ranging from weeks to months.

Should I invest in interval funds?

Consider investing based on your risk tolerance, investment goals, and understanding of the fund's strategy, keeping in mind the potential benefits and risks associated with interval funds.

What are the disadvantages of interval funds?

Disadvantages may include limited liquidity, potential for missed investment opportunities during non-trading periods, and less transparency compared to more traditional mutual funds.

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