Interval Funds

Interval Funds are a kind of mutual fund that invest in different assets such as equity or debt, such as loans and bonds. What is unique about these funds is that you can only purchase or sell units at specific times called “intervals.” These are not like open-ended funds where you can buy or sell units at any time.

In India, the Securities and Exchange Board of India (SEBI) explains to the investors the various types of mutual funds. Interval Funds are one of those, which lies between open-ended and closed-ended funds.

How Does an Interval Fund Work?

An interval fund is a combination of open-ended and closed-end funds:

• Open-ended funds enable users to buy or sell units at all times.
• Closed-ended funds do not let you buy or sell frequently.

Interval Funds allow for buys and sells during specific intervals, which the fund manager allows. That is because the manager will not be distracted from creating investment strategies by redemption requests for selling units.

During these intervals, you buy or sell units at a price that depends on the Net Asset Value (NAV) of the fund. The NAV varies because it is a function of the overall performance of the fund.

Whom Should Invest in Interval Funds?

Interval Funds are appropriate for

• Those who require high yields: Most Interval Funds invest in assets that cannot easily find their way into normal funds.
• Reluctant risk-takers: Anyone willing and capable of bearing risks and willing to invest in less mainstream assets such as private credit, commercial properties, or even forestry projects might take a liking to Interval Funds.
• Short-term investors: If you have a short-term financial goal and can wait until the interval period to redeem your investment, Interval Funds could be a good choice.

Features of Interval Funds

Here are the key features of Interval Funds:

• Investment Horizon: These funds invest in a mix of debt and equity assets. Most Interval Funds in India focus more on debt, which tends to be less risky than equity.
• Liquidity Risk: You can only redeem the units during specified intervals, so the liquidity (how easily you can access your money) is lower compared to other funds.
• Market Volatility: The performance of these funds can be affected by market conditions. During market downturns or market volatility, your returns may fluctuate.
• High Yields: Interval Funds are designed to offer high yields over time, with returns often reaching 6-8% over five years.

Interval Funds: Risks and Returns

• Liquidity Risk: Because you can redeem your investment only at certain intervals, Interval Funds are less liquid than open-ended funds. That is, you cannot access your money when there is an urgent need.
• Returns: Generally, Interval Funds give decent returns. However, returns are relatively low for short-term investments. The average return on five-year investment is around 6-8%.

Taxation on Interval Funds

The taxes on Interval Funds depend on whether the fund invests more in equity or debt:

• Equity Funds: If the fund invests at least 65% of its assets in equity, it is taxed like an equity fund.
• Debt Funds: If the fund invests at least 65% in debt, it is taxed as a debt fund.

Before investing, always check the fund’s asset allocation to understand the tax treatment.

Popular Interval Funds in India

Here are a few examples of well-performing Interval Funds in India based on their returns over the last five years:

Fund Name	1-Year Return	3-Year Return	5-Year Return
IDFC Yearly Series Interval Fund – Series II	8.55%	7.47%	8.03%
Reliance Yearly Interval Fund – Series I	8.53%	7.71%	7.98%
UTI Fixed Interval Income Fund – Annual Interval Plan	6.19%	6.95%	7.69%

These are some of the high-yielding funds, but do remember that past performance is not a guarantee of future performance. Always invest according to your financial goals and risk tolerance.

Conclusion

Interval Funds offer the opportunity to invest in private credit for those investors who are prepared to accept the liquidity risk involved. The investment is suitable for those investors with a wait to redeem at particular intervals and desire high yields over the long-term horizon. Nonetheless, like every investment, a good understanding of the risks would be required before putting your money into it.