Interval mutual funds are those type of mutual funds in which the mutual fund house/ company allows the investors to either purchase or sell the funds only at a particular time, which has already been decided by the company. It is a form of a non-traditional, closed-ended fund that purchases back some number of outstanding shares the shareholders have with them.
How do interval mutual funds work?
In a way, interval mutual funds work as a natural blend of both open-ended and closed-ended funds. Just as in the case of a closed-ended fund, in an interval fund too, you can't buy or sell the fund units very often. Furthermore, these funds may even be listed on the stock exchanges, and the mutual fund companies may allow you to only sell the fund at specific periods, at specific Net Asset Values (NAVs).
In the case of interval mutual funds, the money you put in remains invested for a fixed interval of time, and you can't redeem it unless it attains maturity. Your fund manager's job here is to distribute the money among various securities up until the fund matures. This forms a strong investment strategy, wherein you can be assured of better returns.
These mutual funds generally don't go up on the secondary market. However, many of them do trade at current NAVs continuously. The funds are repurchased periodically, at intervals of six or 12 months, as the fund's prospectus and annual reports state. The fund specifies the price and date at which it is repurchased and based on its per share NAV.
The fees for these types of mutual funds are higher than most of the other mutual funds. And so are the returns.
Who should invest in interval mutual funds?
One feature that stands out in interval mutual funds is that these funds are invested in illiquid assets, meaning that they are invested in those assets which the stock exchange tends not to list. These funds may be invested in assets such as commercial properties, private assets or even business loans, which are unconventional assets. So, if you're looking to invest in one, then interval funds can be the best choice for you.
Interval mutual funds have shorter intervals of entry and exits. What this means is that an interval mutual fund which is closed on an annual basis, that is, for 365 days, will open for short intervals of one or two days, and close again for another 365 days. This means that you don't have to lock-in your money for longer intervals of time, just as you do in closed-ended funds. This will allow you to invest as per your cash flow and offers higher liquidity as well.
Additionally, you also have the option to roll over or carry over your investment to the next interval. This means that redemption at maturity is not mandatory. What's more? Investors can even defer tax incident on them beyond a given interval.
Benefits of Interval Mutual Funds
According to experts, interval mutual funds tend to give a sense of comfort when it comes to the returns you get upon maturity. This is because you can as well get yourself away from all those irregular fluctuations of interest rates that tend to cause high volatility. You're not completely risk-free; however, as the booking rate tends to be lower than the previous one, at the time of reinvesting them, because of the rollover.
Alternatively, though, an FMP with a three or five-year lock-in period should fetch you better yields regarding returns. Over the years, however, interval funds can give better results regarding returns compared to most open-ended funds, because of their heavy investments into commercial papers, which have seen a considerable spike in recent years.
So, investing in interval mutual funds does come with its own set of limitations. But here are a few things you should consider before you start investing in them.
Risks involved in Interval Mutual Funds
As discussed earlier, there are many risks involved with investing in interval mutual funds. These funds won't help you in case of an emergency, where you may need lots of quick cash. This is because of their complete illiquidity, wherein, you can't redeem them in secondary markets, and will have to wait until maturity.
The returns you get
As far as returns are concerned, the interval funds aren't the best types of funds you can go for. Do you know why? Well, it's because most of the interval mutual funds tend to give annual returns of 6 % to 8.5% for five years. What this translates is that the returns are low when compared to other types of mutual funds, for shorter periods.
The investment horizon you have in mind
All interval funds are only meant for short-term goals. So, only those investors whose investment horizons meet the tenure requirements of the fund are able to invest in them and get short-term returns out of it. However, you must be capable of reinvesting the lump sum amount of money given out by these funds at the time of maturity.
Interval funds are fixed income schemes. In that, any investor who's not sure about his or her investment tenure can invest. Also, those investors who are looking to make huge sums of money in a short period can invest in these funds as well. Another fact about interval mutual funds is that they are essentially debt funds which don't provide very high returns, and so they are suitable for the investors with a low-risk appetite.
Any implications it may have on taxes
Interval mutual funds, just like any other mutual funds are taxed according to the magnitude of their investments into debt or equity. The threshold for these funds is 65%. However, these funds are treated as debt funds in case 65% of the funds are invested in debt funds or equity otherwise. Practically though, these funds are considered to be debt funds and will be taxable on long-term capital gains if held for 36 months or more.
Long-term capital gains are taxed at a rate of 20% per annum. Whereas, short-term gains (capital) are part of your income and taxed according to your bracket of income tax. One other thing to note is that long-term capital gains tax is subject to indexation benefits. This means that the investors are taxed above the inflation rates by making adjustments to the securities purchase price.
Interval Mutual Funds vs Fixed Maturity Plans
Interval mutual funds have the characteristics of both open-ended and closed-ended mutual funds. But what many people don't know is that they also have characteristics similar to Fixed Maturity Plans or FMPs. This is because, these mutual funds invest in certain types of securities, similar to those which Fixed Maturity Plans invest in, that usually mature on or before the tenure ends.
However, one of the major differences between the two is that the investor cannot pay an exit load to redeem investments just as he or she does in the case of fixed maturity plans. One other notable difference is that the investor has the option to roll over his or her investments from one period to the other. The best part about these funds is that it helps you meet specific, short-term goals by saving your money. In this, if you feel that you need to save for something big in the coming days, you might as well go for interval mutual funds.
It also helps you to decide the time that you should be redeeming the scheme. However, not all is good about interval mutual funds. These funds are not of much help during financial emergencies. You might be ready to pay an exit load to redeem them. But they don't allow that. The fact is, you simply can't exit them after or before the specified period.
One other limitation of this kind of mutual fund is that they don't offer very high returns, as in the case of some of the other mutual funds. So, that makes them the ideal thing to invest in for all those who have a low-risk appetite.
Although there are a few drawbacks in them, generally, however, interval funds don't have the kind of exposure to redemption pressure. This is the reason that although open-ended funds tend to give higher returns, interval mutual funds tend to give higher visibility of returns. Moreover, in the case of open-ended mutual funds, you can't invest in those assets which tend to be less liquid. The reason is simple. Open-ended funds tend to have daily liquidity, which makes them highly liquid, as compared to interval mutual funds.
So, open-ended and closed-ended as well as interval mutual funds, all have their advantages and disadvantages. While open-ended funds tend to yield higher returns, interval mutual funds, on the other hand, tend to be more liquid and volatile. Also, investors have the choice to resell the shares to the company or firm at the Net Asset Value or NAV, in the case of interval mutual funds.