Mutual funds in India are of different types to suit the requirements of various categories of investors. Here, in this guide, we introduce you to a specific kind of mutual fund – the interval fund. We take a look at the features and benefits of interval funds, who is it for along with identifying the top interval funds in India and a lot more.

What are interval funds? 

Interval fund is a type of mutual fund where investors can purchase/sell units only for a specific pre-decided period. Interval funds invest in debts as well as equities, though they tend to lean towards debt instruments mostly.

Investors can purchase or redeem units only during time intervals specified by the fund house. Since purchasing/redeeming units doesn't happen all the time, they are similar to close-ended mutual funds.

Working of Interval Funds

Interval funds offer the benefits of both closed-ended and open-ended mutual funds. Just like in a closed-ended fund, interval funds are listed on stock exchanges, and investors cannot purchase/redeem units frequently. The fund house allows selling/buying units only during specific periods at current NAVs (Net Asset Value).

Interval funds are similar to FMPs (Fixed Maturity Plans). The money you have invested in an interval fund remains invested for a specific tenure. It cannot be redeemed during this period. The fund manager reinvests your investments during this tenure. The team invests your money in fixed instruments like securities for a specific period. At the end of the maturity period, your units are made available to you. You can then redeem them, thereby enjoying higher returns.  

The most significant advantage of interval funds is fund units are locked in for a specific period. Hence, it makes it easy for the fund manager to create a stable investment strategy. They don't have to worry about liquidity or redemption. Thus, they can choose the best investments for a specific period, thereby increasing the potential for higher returns.

Who is it for? 

  • Investors looking to invest in unconventional assets

One unique feature of interval funds is that they invest in illiquid assets that are generally not listed on exchanges. Some examples include private assets, forestry tracts, business loans and commercial property. If you're an investor who is looking to diversify your portfolio by investing in unconventional assets, then interval funds are the right choice for you.

  • Investors who do not require liquidity 

When you invest in interval funds, your money is locked for a specific period. It’s not possible to redeem your units before the maturity period. Hence, it’s ideal for investors who do not require immediate liquidity. 

Additionally, it also works for investors with low-to-moderate risk tolerance and short-term financial goals. 

Pros and Cons of Interval Funds 

Now that you are aware of the basics of interval funds, let’s take a closer look at the advantages and disadvantages of interval funds. 

Pros of Interval Funds:

  • Potential for higher returns compared to debt funds 

  • Provides you with access to unconventional investments like private equity, forestry tracts, and more 

  • The fund house announces periodic offers to repurchase NAV units from investors

Cons of Interval Funds: 

  • It doesn’t offer liquidity, meaning you cannot redeem shares when you need. 

  • Interval funds have a higher expense ratio compared to closed-ended funds and other equity-oriented mutual funds. 

Additioanl Reading: Types Of Mutual Funds

Factors to Consider before Investing in Interval Funds 

  1. No Liquidity 

Interval funds will not help you raise money during an emergency. They cannot be redeemed before the times specified by the fund house. Even if you are ready to bear the exit load, it's not possible to redeem it before or after the specified period.

  1. Not the Best Returns 

If you are looking for high returns, then interval funds are not the best options. Generally, most interval funds in India offer an annualised 5-year return ranging from 6 to 8.5%. This is low when compared to other mutual funds. Since most interval funds invest in debts and other fixed money-market instruments, they are ideally suited for investors with low-risk appetites.

  1. Works well for Short-term Goals 

Interval funds are generally suited for investors with short-term goals. Before you invest in an interval fund, check if the fund's maturity dates coincide with your short-term goals. Ensure that you have specific goals in mind so that you can utilise the lump sum amount gained from interval funds on maturity.

  1. Works well for Investors who wish to receive Lump Sum amounts at Fixed Intervals

Interval funds provide lump-sums to investors at specific times. You can meet your various financial goals by investing in interval funds whose maturity matches your fund requirements.

  1. Taxation 

Just like all other mutual funds, interval funds are taxed based on whether they invest in equities or debts, the time horizon and other factors. If at least 65% of the fund portfolio is in debts, it's taxed like a debt fund. On the other hand, if at least 65% of the fund portfolio is in equity, it's treated as an equity fund for taxation purposes.

Generally, most interval funds are debt-oriented and attract long-term capital gains if the fund is held for three years or more. Short-term capital gains are added to your taxable income and are taxed as per your prevailing income tax slabs. 

List of the Best Performing Interval Funds in India

Here, we list out some of the top interval funds in India, based on their performance over the last five years. 

S.No. Name of the Fund 1-year Return 3-year Returns 5-year Returns
1 ICICI Prudential Interval Fund 6.79 8 9.54
2 IDFC Yearly Series II Interval Fund 8.55 7.47 8.03
3 UTI Fixed Annual Interval Income Fund 7.31 8.63 9.9
4 Reliance Interval Fund – Annual 7.99 7.46 7.85
5 Reliance Yearly Interval Fund 8.53 7.71 7.98

 

*Note that returns from these funds are subject to change based on market fluctuations. Make sure to choose funds based on your investment goals. 

#Data as on December 2019

EndNote

Choose the Right Interval Fund that Matches your Investment Horizon 

While selecting an interval fund, make sure to analyse the fund using the following factors:

  • Investment horizon

  • Risk involved

  • Returns expected 

  • Financial goals

  • And, Tax implications 

Make sure to compare the average returns of different interval funds from various fund houses and choose the best one that matches your financial goals.