Interval funds: A middle ground between open-ended and closed-ended mutual funds

If you see the many categories of available mutual funds, you will realise that there are many choices to suit various investor goals and risk appetites. One such category that is still not known to many investors is interval mutual funds. These funds that lie between open-ended and closed-ended funds and have specific windows where investors can purchase units.

In this article, we will explore the meaning of internal mutual funds, how they work, their features, benefits, key points, taxation and things to consider before investing in these funds.

• Table of contents

• What are interval funds?
• Functions of interval mutual funds
• Key characteristics of interval funds
• Reasons to invest in interval funds
• Key points to remember about interval funds
• Who are interval funds suitable for?
• Things to consider as an investor

What are interval funds?

Through interval funds, investors can buy or sell shares at predetermined intervals, such as annually. Unlike open ended mutual funds, where investors can trade units at any time - or close ended funds that lock in investments until maturity - interval funds strike a balance by offering liquidity at specific intervals. So, purchase and redemption requests can only be made during these specified transaction intervals. As per regulatory norms, the transaction period must be for a minimum of 2 days and there should be at least a 15-day gap between two transaction windows.

Between these intervals, the schemes are also listed on stock exchanges and investors can make buy or sell units there.

Functions of interval mutual funds

Interval funds blend features of both open ended and closed ended mutual funds. Unlike regular mutual funds, investors can only buy or sell units during specific time frames set by the asset management company. These funds are uncommon, with only a few available in the market.

During the designated period, investors can purchase or redeem units at the fund’s current Net Asset Value (NAV). Since redemptions are restricted to specific intervals, fund managers can focus on long-term investment strategies without the pressure of frequent withdrawals.

Interval funds typically invest in debt instruments, offering relatively stable and low risk returns. This makes them suitable for conservative investors looking for the potential for regular income. While they provide limited liquidity, they also offer a structured investment approach with potentially better returns than traditional fixed-income options.

Also Read: What are different types of equity funds in India?

Key characteristics of interval funds

Limited liquidity

These funds are not as flexible as open ended mutual funds. Investors can only buy or sell units during specific time frames set by the fund house. In the interim, they can buy or sell it directly on the stock exchange.

Relatively stable

Interval funds investing in debt securities are relatively stable compared to equity oriented funds. They may be suitable for conservative investors.

Taxation rules vary

The tax treatment of interval funds depends on their investment mix. If the fund invests primarily in debt securities, it is taxed like a debt fund. Capital gains are added to the investor’s annual income and taxed at their applicable slab rates.

Reasons to invest in interval funds

Here are some of the advantages offered by interval funds:

1. Interval funds can invest in less liquid and higher-yielding debt instruments.
2. They are less affected by daily market fluctuations because investors can only redeem at specific intervals.
3. The limited liquidity helps investors stay invested and avoid reacting to short-term market noise.
4. Fund managers have a more stable pool of capital because they don’t have to deal with the pressure of redemptions, which can help in better portfolio planning.
5. Can be suitable for short- to medium-term goals if you're comfortable with limited access to your money.

Key points to remember about interval funds

Limited liquidity

Investors cannot buy or sell units anytime. They can only redeem them during specific intervals set by the fund house. In the interim, they can trade them on the stock exchange, subject to demand and supply.

Aligned with investment horizon

Ensure that your investment horizon matches the interval fund’s maturity date as these funds offer redemptions only during set windows.

Who are interval funds suitable for?

For those who can wait for specific redemption periods and do not require immediate liquidity, interval funds can be a suitable option.

They are also suitable for those looking to diversify their portfolio for relative stability.

Additionally, investors who are willing to take moderate risk for better return potential than traditional avenues may find interval funds suitable.

Things to consider as an investor

Investment horizon: Before investing, you must know if you are comfortable with the limited redemption windows.

Fund performance: It is always better to evaluate the performance of the fund in the past* and its strategy to allocate funds before investing.

*Past performance may or may not be sustained in future

Liquidity needs: If you need quick access to your money, interval funds may not be the right choice.

Also Read: Wealth Creation Vs. Chasing Returns: The Smart Investor's Dilemma

Conclusion

Interval mutual funds combine elements of both open ended and close ended mutual funds. Interval funds in India are predominantly debt-oriented, offering relative stability. However, their limited liquidity may make them unsuitable for investors who need ready access to their funds. It is advisable to understand all aspects about these funds or consult a financial expert before investing in them.

FAQs:

What is the interval scheme of mutual funds?

The interval scheme of mutual funds is a balance between open ended and closed ended funds that allows investors to redeem units only at specified intervals.

What are the advantages of interval funds?

Interval funds offer benefits like diversification, potential for returns and professional fund management.

Are interval funds risky?

The risk profile depends upon the nature of securities in the scheme. Interval funds are typically debt-oriented and could be low-to-moderate or moderate risk. The risk level will vary from one scheme to another. Check the scheme information document for details.

What is the duration of interval funds?

There is no fixed duration for interval funds, but redemptions are allowed at pre-specified intervals such as quarterly, semi-annually, or annually.

Should I invest in interval funds?

You can invest in interval funds if you can tolerate moderate risk, and your investment horizon matches the maturity period of the scheme. However, if you need easy access to funds, interval schemes may not be suitable.