Interval Funds

Mutual funds have become one of investors’ favorite investment options in recent years. Many choose mutual funds to save taxes, build wealth, and achieve goals. There is a mutual fund for every type of investor, every type of financial goal, and various levels of risk tolerance. As an investor, it is important to learn how mutual funds work so that you can choose the right one for your investment journey.

In recent years, mutual funds are becoming one of the most popular investment instruments in our country. Before we dive deep into the topic of interval funds, we should know what mutual funds are.

Mutual funds collect money from several investors and all the money is then invested in a mutual fund scheme. They are managed by highly skilled professionals called fund managers. The obvious question here is, how is this different from stock trading? Stock trading is when you buy individual stocks of different companies. But mutual funds club the stocks of a couple of companies to maximize returns and reduce risk.

For example, you want to buy stocks for ₹10,000. Firstly, stock trading requires hours of research and months of tracking the data of a particular stock. You do all your homework and buy the shares of ABC company. Let’s say, ABC company is an IT (Information Technology) firm and it provides its services to clients in Europe and the U.S. One share of ABC costs ₹2000, and you have bought 5 shares. The problem here is that your profits will solely depend on the performance of ABC. If the value of the shares falls, the stock, which was worth ₹10,000 earlier, might be worth ₹8,000 later.

So, how do you remedy this? You take your ₹10,000 and invest across the stocks of several companies, which belong to different industries. In this case, even if the value of one company’s share declines, the other company stocks will be performing well. So, the losses made by one stock will be adjusted by the profits made by the other stocks. This is what mutual funds do. They take your money and invest across various companies’ stocks, debt instruments, commercial papers, and so on. This helps you to earn returns even during stock market crashes.

Broadly, mutual funds are classified into two categories. They are open-ended and close-ended funds

Now that we have understood what mutual funds are and their types, we can continue learning about interval funds, how they work, who are they suited for, their benefits, and what factors you should consider before investing in them.

Interval funds offer the perfect combination of both close-ended funds and open-ended funds. They are a type of mutual fund, where the units can be purchased or sold during a particular predetermined time period only. For example, every fifteen days or any other time period as specified by the mutual fund house.

Interval funds can invest in debt and equities. However, they are mostly observed to put their funds in debt instruments. The units may be traded on the stock exchange or may be open for sale or redemption during pre-decided periods at NAV (Net Asset Value)-related prices.

Interval funds have the characteristics of both close-ended funds and open-ended funds. Similar to close-ended funds, interval funds do not permit investors to buy or sell units frequently. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV-related prices. Fixed Maturity Plans (FMPs) are similar to interval funds.

In FMPs, the fund manager follows a buy-and-hold approach, which helps to keep the expense ratio lower. Similarly, in interval funds, the money remains invested for a fixed tenure in interval funds and cannot be redeemed before maturity. This means that you will not be losing out on returns. However, unlike FMPs, you cannot pay an exit load and redeem your investments prematurely. Interval funds allow investors to roll over their investments from one specified period to another. This facility is not available in FMPs.

Interval funds are ideal for investors with short-term goals within a specific time period. If you would like to save up for an event that requires funding in the next few months or one year, you can choose Interval Funds as you can decide the time interval that allows you to redeem the amount.

On top of that, the idea is to invest funds in illiquid assets. This is mainly because interval funds deal with unconventional assets, like forestry tracts, commercial property, business loans, etc. Interval funds are also suitable for investors, who have a low to moderate risk appetite.

There are several advantages to investing in interval funds. Here’s a list of benefits you will get when you invest in interval funds.

Yield, either via appreciation of an asset or through dividends and interest, is the amount of extra money you can expect to make with an investment over a certain period of time. As we have mentioned above, interval funds invest in illiquid assets that other funds don't. Since these assets are more complicated to invest in, they earn higher interest rates on debt securities and generally achieve higher appreciation over time. This is, sometimes, called the "liquidity premium."

Due to an interval fund's unique structure, fund managers can put funds into investments that are difficult to handle for funds with higher turnover. Interval funds only need to have cash on hand a few times a year. Hence, a bigger proportion of capital can be put into securities with higher barriers to entry and exit.

These alternative assets include project debts, hedge funds, real estate securities, small business loans, etc. Interval funds offer exposure without individual investors undertaking the cost of buying whole loans, properties, or physical assets. This access to diverse assets helps interval funds offer higher yields. This helps an investor's wealth withstand an inevitable decline in the market, and it gives exposure to growth opportunities that are inaccessible to other types of funds.

When you invest in funds that invest in market-linked securities, the fund's value declines when the market takes a dive. So, for those investors looking to bring stability to their investment portfolio, especially if their portfolio has a lot of exposure to market-linked instruments, you can consider investing in interval funds. Since these funds tend to have lower market correlation than other types of funds, they offer stability to one's portfolio.

Interval funds are appealing to investors who are looking for stability because of their consistent pricing. Shares of interval funds are bought and sold at net asset value (NAV), which is calculated daily. Shares can only be purchased from the fund, and they can only be back to the fund at a few set intervals throughout the way. Hence, in times of market volatility, the value of an interval fund’s shares is stabilized.

We learned about the various benefits of investing in interval funds. However, there are certain things one should consider before investing in interval funds.

Before you choose any investment instrument, you should see whether it will help you achieve your financial goals. If you have a goal you wish to achieve in 3 years, you cannot invest in an instrument that will lock your funds for 15 years. So, it is important to analyze your financial objectives before you choose the investment option for yourself.

Since interval funds are fixed-income schemes, it is best suited for investors who are not sure about their investment horizon or investors who have short-term goals. Also, interval funds work best for investors who wish to receive lumpsum amounts at fixed intervals.

Interval funds are entirely illiquid and there are no secondary markets where they can be redeemed. You won't be able to sell interval fund shares anytime you want to or need to. They can only be redeemed during the times specified by the fund house. So, it is important that you read the fund's prospectus to understand the intervals applicable to the fund you are considering, and what percentage the fund will repurchase at each one.

Interval funds may not offer higher returns. Generally, most interval funds in India offer an annualized 5-year return ranging from 6 to 8.5%. This percentage of return is low compared to other mutual funds. Since most interval funds invest in debt and other fixed money-market instruments, they are an ideal investment option for investors with low-risk tolerance.

As mentioned above, interval funds are suited for achieving short-term goals. So, if your investment horizon is equal to the maturity dates of interval funds, you can consider investing in them to earn short-term returns.

Interval funds attract taxes and here’s how they are taxed.

The taxation associated with interval funds in India is based on the number of assets invested in equity and debt. If a minimum of 65% of the portfolio is debt, it is considered as debt funds and if the same proportion is in equity, it is considered as equity funds for tax purposes.

If you stay invested in interval funds for more than 36 months, LTCG is taxed at the rate of 20% with indexation benefits.

STCG forms a part of one’s income and is taxed based on income tax slabs.

Interval funds are an ideal investment option for investors with low-risk appetites and who are looking to stay invested for the short term. You can also consider investing in interval funds if you don’t have a fixed investment horizon. If you wish to invest in interval funds, you can create an account with Koshex and start investing for free!

Apart from Mutual Funds, you can also invest in Smart Deposits, Digital Gold, Fixed Deposits, and more, through your Koshex Account. You can also track your expenses, build a budget, invest in hyper-personalized investment recommendations, monitor your investments, stay on top of your savings goals, and more with Koshex.

Also, if you are looking to learn about other investment instruments like Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blog page. We also write about different types of mutual funds, including Equity Mutual Funds, Debt Mutual Funds, ELSS funds, and more. Moreover, we write about money management, tax planning, improving financial skills, and other personal finance topics, helping everyone to plan their finances better.

If you are ready to start investing, download the Koshex app or visit our website today. We are truly built for every aspiring & experienced Indian investor. Sign up for free today.