KNOWLEDGE CENTRE Mutual Fund Types / What Are Interval Funds?

What Are Interval Funds?

Interval funds are a type of mutual fund scheme where they units can be bought or sold only at specific time intervals. These funds are not traded on the stock exchanges. The asset management companies (AMCs) periodically offer to repurchase a certain percent of the outstanding units at a specified Net Asset Value (NAV).

Interval funds basically act as a close-ended mutual fund for most of the time. The rules related to such funds and the type of underlying assets acquired through the fund corpus makes these very illiquid which make them suitable only for long term investment and one that doesn’t require emergency withdrawals. One of the biggest reasons why you may want to invest in these types of mutual funds is the potential higher yields.

What Is The Difference Between Interval And Close-Ended Funds?

Traditional both these types of funds are very similar to each other in the aspect that close-ended and interval funds allocate their corpus in illiquid assets. Furthermore, both these types of funds provide complete transparency with daily prices.

However, one difference between these two types of funds is that close-ended funds allot shares only once during the New Fund Offer (NFO) period. On the other hand, interval mutual funds constantly make share offerings. Moreover, these funds sell the units at the NAV. In comparison, close-ended funds allow trading at market prices, which may be higher or lower than the NAV. Finally, the last difference between these two funds is the frequency of redemptions. Close-ended funds may be traded daily during the trading hours. However, interval funds restrict redemption period to specified intervals.

What Is The Difference Between Interval And Open-Ended Funds?

Most mutual funds are open-ended schemes wherein you may buy and sell units at any point in time at the NAV. The accumulated corpus is invested in different asset classes such as equities, debt, and bonds. Open-ended funds are not traded on the secondary markets.

Open ended funds also allow the However, interval mutual funds are primarily close-ended schemes that invest the corpus in illiquid securities. The units in such schemes may be bought or sold only during the predetermined redemption period.

Should You Invest In Interval Funds?

Now that you know what interval funds are, you may want to know the purpose of such funds. The investment mandate allows the fund corpus to be invested in both debt and equity instruments. However, a majority of the same is invested in debt products.

If you want to invest a lump sum amount that may be redeemed at a particular point in time, these funds are an ideal investment option. These types of mutual funds are recommended to meet short-term financial goals within a specified period. Although buying such funds is not very difficult, it may be expensive as AMCs may have a certain minimum investment that may be very steep.

However, interval mutual funds are not liquid and therefore, not beneficial during emergencies. This is true even if you are willing to pay the exit load, you may not be able to exit before the redemption period. If you are a risk-averse or moderate risk taker, interval funds are an excellent mode of investment.

What Are Advantages And Disadvantages Of Interval Funds?

Before you decide to invest in these types of mutual fund, it may be beneficial to understand its advantages and disadvantages.

Advantages of interval funds

1. Compared to most open-ended mutual funds, the returns on interval mutual funds are significantly higher
2. The NAV of interval mutual funds is less volatile because of lesser exposure to the stock markets
3. Retail investors like you have the option of investing in institutional-grade investments at a relatively lower lump sum amount
4. Because these funds are illiquid, it prevents “buy high – sell low” mentality

Disadvantages of interval funds

1. There may potentially be conflict of interest and transparency issues because the fund manager may invest in other funds of the AMC
2. In comparison to open-ended mutual funds, interval mutual funds are highly illiquid
3. Generally, the minimum investment amount is significantly higher than the limit levied by open-ended funds
4. You may not be able to redeem all your units during the redemption period because of pro rata repurchase by the fund houses
5. Although interval mutual funds deliver higher yields, the expenses are also higher than open-ended mutual funds

Prior to investing in interval mutual funds, it is important to evaluate and analyze the various available options. It is crucial that you determine the fees to ensure these are not high as that may actually reduce your interest income.

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