It is a good thing for mutual fund investors that several investment options are available in the market. SEBI has categorised the mutual fund products available in the market to help investors make informed decisions. This categorisation is based on the type of asset in the scheme, investment horizon, and others. Another categorisation is based on whether the product is open-ended, close-ended, or interval funds.
Internal funds are a type of mutual fund where units can be bought or sold on a predetermined period only. Here we will discuss interval mutual funds, the features, and the benefits of investing in these funds.
Let’s begin by understanding: what are interval funds?
What are interval funds?
Interval funds are different from common open-ended mutual funds. These funds can invest in debt and equities both. But these have restricted liquidity and can be bought and sold at a predetermined time. Investors usually use interval funds to park their capital in debt funds. These funds combine the features of close-ended and open-ended funds. Investors can trade the units on the stock exchange or redeem them during a pre-decided period at NAV price.
Features of interval mutual funds
Here are the critical features of an interval fund.
- • Because of their specialised design, these funds are best suited for short-term investment.
- • These funds are highly illiquid. Investors can buy or sell the units only at a specified time.
- • Interval funds typically invest in debt securities. Hence, these funds rank low in the risk spectrum.
- • Investors need to be careful about the expense ratio. Usually, interval funds charge more than other mutual funds.
- • Taxation depends on the quantum of investment in debt or equities.
How do interval funds work?
Interval funds are a combination of open-ended and closed-ended funds. These funds allow investors to buy or sell units only during a particular window. Since they are rare, only a few funds are available in this category. During the predetermined window, investors can buy or sell their units at a prevailing NAV.
The asset management company determines the interval when investors can redeem their units. Hence, it allows fund managers to create a solid investment strategy without worrying about redemption by investors.
Interval funds primarily invest in debt instruments to earn low-risk returns.
Who should invest in interval mutual funds?
Each mutual fund is designed with a specific focus to cater to the specialised investment needs of investors. Similarly, interval funds also serve the particular needs of investors. These funds invest in illiquid assets like commercial properties, forestry tracts, business loans, and others, which are suitable for investors looking to invest in unconventional assets. These funds are also appropriate for short-term investors with a low-to-moderate risk profile.
Benefits of interval mutual funds
- • The returns earned by interval mutual funds are often more than open-ended mutual funds.
- • It allows retail investors to gain exposure to unconventional assets.
- • Investors can invest in institutional-grade alternative investments with low minimums.
- • The asset management company makes periodic offers to investors to repurchase shares at NAV.
Things to consider as an investor
Many investors compare interval funds with closed-ended funds. But the closed-ended funds don’t allow investors to withdraw for a long time. But these funds allow investors to buy and sell during a predetermined window. It also shares characteristics with fixed maturity plans (FMP). The following are the points that investors should remember while investing.
Risk and returns
Interval funds primarily invest in highly illiquid assets and are available for redemption only during a specific redemption window. Hence, you will not be able to use your fund during an emergency. You can’t also sell your units in the secondary market.
However, interval funds have earned more returns than open-ended funds. Investing in alternative types of assets also helps increase interval fund yields. Typically, interval funds have generated an average return of 6-8 percent for five years.
Investing according to your investment plan
Interval funds are ideal for parking your investment for the short term. While these funds can invest in debt and equities, most schemes will invest in debt instruments. Hence, these are suitable for low-risk investors and offer low returns.
Buying is easy but expensive
These funds usually offer to sell their units at the prevailing NAV value regularly, which can increase the cost of investing. Sometimes these units are restricted to accredited investors. But often, these units are also available to retail investors to buy.
Restricted selling opportunities
Investors of interval funds can’t sell their units at any time. These funds allow predetermined windows when buying and selling of units are possible. Also, you may not be allowed to sell all your units simultaneously.
High yields
Because of the illiquid structure, fund managers can invest without the pressure of redemption. It allows them to work on solid investment strategies to earn higher returns. The ability to invest in alternative assets also improves the yields of interval funds.
Costs are high too
On the flip side, interval funds are more expensive than open-ended funds. The expense ratio of these funds can be higher than 5.75% and include sales, management, servicing, and operating charges.
Tax implication
In the case of mutual funds, the taxation rule depends on the ratio of fund allocation. The same rule applies to interval funds. It depends on whether the fund primarily invests in equities or debt. If fund allocation in equities is more than 65 percent, then it will be treated as an equity fund during taxation. Similarly, if the interval fund invests 65 percent or more in debt instruments, it will be treated as a debt fund.
How to Invest in Interval Funds?
Investing in interval funds is simple. All you need to do is follow the steps outlined below.
- Step 1: Log into your trading platform using your credentials.
- Step 2: Navigate to the mutual fund section of the platform.
- Step 3: Search for the interval fund you wish to invest in.
- Step 4: Enter details like the amount, the mode of investment and the frequency.
- Step 5: Submit the mutual fund subscription request.
That’s it. The NAV at which the units are allotted will be determined depending on when you submit the mutual fund subscription request.
Top 5 Interval Funds for Investment in India
If you’re interested in interval funds, here’s a table outlining the top funds that you can consider investing in.
| Interval Fund | 1-Year Returns | 3-Year Returns | 5-Year Returns |
| Aditya Birla Sun Life Interval Income Fund – Quarterly Plan – Series 1 – Direct Plan – Growth | 7.31% | 5.45% | 5.28% |
| Nippon India Interval Fund – Quarterly – Series 2 – Direct Plan – Growth | 7.24% | 5.31% | 5.39% |
| Nippon India Interval Fund – Annual – Series 1 – Direct Plan – Growth | 7.09% | 5.24% | 5.62% |
| UTI Quarterly Interval Fund – III – Direct Plan – Growth | 7.01% | 5.00% | 4.91% |
| UTI Annual Interval Fund – II – Direct Plan – Growth | 6.98% | 4.85% | 4.91% |
Note: The returns data for all the above funds are as of January 09, 2024.
Conclusion
Interval funds in mutual funds is a subcategory that combines the features of open-ended and closed-ended funds. These funds have restricted liquidity, allowing the fund manager to create an investment strategy without worrying about investors withdrawing their capital. Now you have learned interval funds meaning, you can explore to find where it fits in your investment plan.
FAQs
What are the risks of interval funds?
As with any market-linked investment option, interval funds are also subject to multiple risk factors. These include liquidity risk, valuation risk, market risk and interest rate risk, among others.
What are the benefits of interval funds?
Interval funds offer certain key benefits like asset diversification, regular income distributions, stable NAV and professional management.
What are the fees for interval funds?
The fees for interval funds can vary based on the fund and its management structure. The expense ratio for these funds can range anywhere from 0.05% to 0.30% or maybe even higher.
How long is the interval fund?
The interval for redemptions or purchases can vary depending on the type of interval fund. The most common intervals are monthly, quarterly and annual.
