An interval fund is a type of mutual fund the units of which can be purchased and sold/redeemed only during time intervals specified by the fund house. The time intervals could be monthly, quarterly, semi-annual or annual. Thus, you can say an interval fund represents a mix of open-ended and close-ended funds in terms of subscription and redemption features. Very few mutual fund schemes are launched as interval funds. A recent example of this type of fund would be IIFL Capital Enhancer which is scheduled to open and close for subscription once every year after its launch in May 2018.
Interval Fund vs Close-ended Fund
Unlike, a close-ended fund, an interval fund is generally not listed on stock exchanges or other secondary markets and thus its investors can redeem their units by selling them to the fund house during the specified redemption periods.
Interval Fund vs Fixed Maturity Plan (FMP)
An interval fund is similar to a fixed maturity plan (FMP) because your money remains invested in the fund for a fixed tenure and you cannot redeem the investment before maturity. However, in an interval fund, the redemption periods occur at intervals during the tenure of the fund while in an FMP, you have to wait until maturity.
Features of Interval Funds
- Asset Allocation: An interval fund can invest in both equity and debt. However, it mostly invests in debt instruments.
- Illiquidity: Since, the units of an interval fund can be bought and sold only during specific intervals, it does not provide much liquidity to investors. Thus, an interval fund cannot act as an emergency fund. However, due to this illiquidity, the fund manager of an interval fund is better positioned to invest in securities which have tenures matching the fund’s maturity period and provide better returns to investors.
- Cost: The expense ratio of an interval fund is generally higher than other mutual funds.
- Risk: Since an interval fund predominantly invests in debt securities, it is a low risk investment instrument.
Who Should Invest in Interval Funds?
An interval fund is ideal for investors who have short-time financial goals and who are willing to take low to moderate level of risk.
Taxation of Interval Funds
The taxation of an interval fund depends on how much of its assets are invested in equity and debt. If at least 65% of its assets are invested in equity and equity-related instruments, it is taxed like an equity fund and otherwise like a debt fund.
You can read about the taxation of mutual funds in detail here.