What are Interval Funds? How do they work?

Mutual funds are investment vehicles that collect funds from investors and invest the pool in company stocks, fixed-income securities, bonds, etc. These schemes aim to generate good returns on investments for investors. Mutual funds are a popular investment option in India, since many of these offer good returns and varying risk elements. These are managed by professional fund managers who work towards earning the maximum possible returns. Mutual funds come in different formats and categories. Investors can choose schemes that best suit that risk appetite and after studying various factors surrounding these. 

Here, we will explore the concept of Interval mutual funds and explain how these work.

What is an Interval Mutual Fund?

An interval mutual fund allows its units to be purchased and sold/redeemed only in specific intervals as prescribed by the fund house. The time intervals are usually monthly, quarterly, semi-annually or annually. An interval fund can be called a mix of open-ended and close-ended funds as far as subscription and redemption is concerned. 

Interval Funds invest in equity or debt instruments or a combination of both. The units of interval funds could be traded on the stock exchange and these could be open for sale or redemption only during pre-decided periods as announced by the fund house. 

How do Interval Funds Work?

Interval mutual funds are like fixed maturity plans, since an investor’s money stays invested for a fixed time period. The investment cannot be redeemed before the maturity date. Since there is no redemption or liquidity during this period, the fund manager of an interval fund gets the opportunity to establish a robust investment strategy. Investor’s money is allocated to securities for a time period that suits the fund’s maturity.

Key Features of Interval Mutual Funds

Some of the noteworthy features of interval mutual funds are as follows: 

1. Illiquidity: Interval mutual funds are illiquid, since investors can invest in these only during a specific time period. Investors have the option to continue the investment from one interval to the other. This is called rollover of funds. There is no compulsion to redeem the investment upon maturity. However, interval funds cannot be redeemed before maturity. Even if there is an emergency which requires an investor to exit the funds, he/she cannot do so. There are no secondary markets for redeeming these mutual funds.
2. Interest rate protection: Interval mutual funds are better protected against interest rate risk as compared to open-ended mutual funds. Since an investor’s money is locked in for a specific period, interest rate fluctuations do not tend to have a major impact on interval funds. For risk-averse investors who are looking for a fixed income from their investment, interval funds make for a good investment option since these primarily invest in debt instruments.
3. Ideal for short-term goals: Investors who are looking for short-term returns can invest in interval mutual funds as these provide a lump sum amount at the end of the maturity period. Investors must, however, have concrete goals for utilizing the lump sum amount that gets paid upon maturity.
4. Comparatively Low Returns: As compared to other short-term mutual funds, interval funds do not offer high returns to investors in the short run. Therefore, these may not suit aggressive investors who are looking for higher returns.

Tax implications of interval mutual funds

Index funds are taxed as per the proportion of investment in debt or equity. Here are some important points to note:

1. If at least 65% of the portfolio is focused on debt, then these are treated as debt funds for taxation purposes. Same goes for equities.
2. If the investment is locked in for over three years, investors will have to pay long-term capital gains tax. Long-term capital gains are taxed at 20%.
3. Investors may also have to pay short-term capital gains tax as per the applicable income slab.

Who Should Invest in Interval Funds?

An interval fund is designed for investors who have specific short-time financial goals and have a low to moderate risk appetite. Investors looking to invest in interval funds must be willing to get an exposure to unconventional assets such as forestry tracts, commercial property, business loans, and private assets. 

Investors who are considering an investment in interval funds must keep a close watch on the risks involved, returns generated, tax implications and the investment timeline of these funds.

Top Interval Funds in India

Before investing in an interval mutual fund, investors must carefully analyse them. It is also advised to compare personal financial goals, risk appetite, and total investment horizon against the interval fund features. The table below has performance statistics of the top interval funds in India. This can help new investors make a choice easily while investing.

Funds	1yr return	3yrs return	5yrs return
Nippon India Yearly Interval Fund – Series 1 – Direct Plan – Growth	5.81	7.14	7.27
IDFC Yearly Series Interval Fund – Series II	5.51	6.90	7.11
Nippon India Interval Fund – Annual – Series 1 – Retail – Growth	4.14	6.27	6.62
UTI Fixed Interval Income Fund – Annual Interval Fund – IV	3.10	4.94	5.99

Conclusion

Before investing in interval funds, investors must ensure to weigh the pros and cons against personal investment goals. It is important to especially consider the liquidity factor as well as exposure to alternative asset forms while investing in an interval mutual fund.

FAQs

1. What are interval funds?
   Interval Fund is a type of mutual fund that has specific time periods for the purchase/sale of fund units. These funds invest in equities and debt securities but focusing primarily on debt investments.

2. How do interval funds work?
   Interval funds allow buying and selling of units only during pre-specified intervals or time periods. These funds mostly invest in debt instruments and may also have small percentage exposure to equities. These are illiquid funds, since investors cannot exit the fund except after maturity.

3. Should I invest in interval funds?
   If you are looking for investment options that provide exposure to alternative asset forms and are not looking for liquidity, then interval funds can be a good choice. To make the most of these, you must have specific goals that align with the time period of the interval fund.

4. Is an interval fund a closed end fund?
   Interval funds can be called closed ended funds since these do not allow buying and redemption of units except on pre-determined timelines as per the guidance issued by the fund house.

5. What are the benefits of an interval fund?
   Interval funds can be ideal for investors who are looking for less traditional investment options from mutual funds. Since these invest mostly in debt instruments, they are best suited for investors who have low to medium risk appetite.