What are Interval Mutual Fund Schemes?

In India, the classification of different mutual fund schemes has been done by the Securities and Exchange Board of India (SEBI) to help investors make decisions. Interval mutual fund is one of them. Interval Mutual funds are non-traditional type mutual funds mostly available to anyone. These funds allow you to invest your money for a specific period according to your financial requirements, and you can continue the investment from one interval to the other, which is known as rollover of funds.

What are Interval Mutual Fund Schemes?

Interval Fund is a category of Mutual Fund wherein the fund house allows purchasing and/or selling or redeeming the units only during a specific pre-decided period or intervals. The fund house declares these intervals for the investors. Interval mutual funds provide multiple entries and exit points. These entry and exit points are determined in advance, and it could be monthly, quarterly, semi-annual, or annual. The number of mutual fund schemes launched as interval funds are very few, and they can invest in equities or debt securities or both.

Characteristics of Interval Funds

Asset Allocation: These funds can invest in equities or debt securities or both, but they usually invest in debt instruments.

Illiquidity: The interval mutual fund units can be bought and sold only during specific intervals, therefore it hardly provides much liquidity to investors.

Cost: In an interval fund, the expense ratio is generally higher compared to other mutual funds.

Risk: As an interval fund mostly invests in debt securities, it is a low-risk investment instrument.

How do Interval Mutual Funds work?

Interval mutual fund schemes combine the features of open-ended as well as closed-ended funds in terms of subscription and redemption features. An interval fund is usually not listed on stock exchanges or other secondary markets, and you cannot purchase or redeem units regularly. While very few mutual fund schemes are launched as interval funds, some schemes might also be listed on the stock exchange. Fund houses may allow sale or redemption during predetermined intervals at the current Net Asset Value (NAV).

An Interval fund is also similar to a Fixed Maturity Plan (FMP) where your money stays invested in the fund for a fixed time. However, redemption periods occur at specified intervals during the tenure of the fund, unlike an FMP, where you have to wait until maturity.

The fund manager of interval funds is better placed to utilize the investments. He allocates your money in securities for a tenure that matches the fund’s maturity. Here as the interval is fixed by the fund house in which the units can be sold, the fund manager doesn’t have to worry about redemption requests and liquidity. He gets an opportunity to create a robust investment strategy that delivers better returns.

Who should invest in an Interval Mutual Fund?

The USP of interval mutual funds is that these funds invest in non-liquid assets like forestry tracts, business loans and private as well as commercial property. Being unconventional assets, these are not listed on the stock exchange. These are ideal for investors who want to get exposure to such unconventional assets and also suit investors with short-term financial goals and risk tolerance of low-to-moderate level.

Things to consider before investing in an Interval Mutual Fund

While investing in Interval Mutual funds, it is essential to check on the risks involved, the returns that can be expected, financial goals, and tax implications.

Risk

Interval funds are highly illiquid in nature and can hardly help in case of an emergency. You neither can sell the units of interval funds in any secondary market nor can pay the exit load and redeem the units of these funds before or after the specific period during any emergency. The overall fees for interval funds also tend to be much higher.

Returns

In India, interval funds generate returns at the rate of 6-8.5% over a period of five years. In the short term, the returns are considerably lower compared to other types of funds.

Financial Goals

It helps individuals achieve short-term goals with a specific period. If your investment horizon matches the date of maturity of the interval fund at which redemption is allowed, then you can invest in it to earn short-term returns. As these are mostly debt-oriented, they offer relatively lower returns, and these funds are suited for investors with low-risk appetite. They are also suited for investors who are looking for investing lump sum amounts to redeem them at a fixed time.

Taxation of Interval Funds

The taxation of an interval fund depends on the percentage of investments invested by the scheme in equity and debt. If a minimum of 65% of the assets is invested in equity and equity-related instruments, it is taxed like an equity fund. Similarly, if a minimum of 65% of the total assets of the fund invested in debt instruments, then it is treated as a debt fund for tax purposes. Check the asset allocation that the scheme plans to follow carefully to understand the tax rates.

To conclude, if you are looking for short-term returns on a lump sum amount after a particular period, then interval mutual funds are the best to utilize your financial goals. And as your money is locked-in for a specific period, you are also protected from interest rate fluctuations. Moreover, investment in the interval mutual fund is also hassle-free.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh