What Is an Interval Fund? Meaning, Features & How It Works in India

What Is an Interval Fund?

An interval fund is a type of mutual fund that allows investors to buy or redeem units only during specific transaction periods announced by the fund house. Between these intervals, purchases and redemptions are not permitted through the fund.

Unlike open-ended funds, where transactions are allowed on any business day, an interval mutual fund opens for transactions only at predefined intervals. Depending on the scheme, these transaction windows may be available quarterly, half-yearly, or annually.
 

How Does an Interval Fund Work?

An interval fund follows a structured investment process where transactions are permitted only during specified periods.

1. The Fund Announces a Transaction Window

The fund house informs investors about the dates during which units can be purchased or redeemed. As per SEBI guidelines, every transaction window must remain open for at least two business days.

2. Investors Buy or Redeem Units at NAV

During the open period, investors can purchase new units or redeem existing units based on the applicable Net Asset Value (NAV) of the scheme.

3. The Scheme Closes for Transactions

Once the transaction window closes, investors cannot buy or redeem units directly through the fund until the next scheduled interval. Even by paying an exit load, redemptions are generally not allowed during this period.

4. The Fund Manager Manages the Portfolio

During the closed period, the fund manager continues managing the portfolio according to the investment objective without frequent redemption pressure from investors.

5. The Next Transaction Window Opens

The scheme reopens on the next announced interval. SEBI also requires a minimum gap of 15 days between two transaction windows, allowing investors adequate notice before the next transaction period.
 

Features of an Interval Fund

Interval funds have characteristics of both open-ended and closed-ended mutual funds.

Fixed Transaction Windows

Investors can purchase or redeem units only during the predefined transaction periods announced by the fund house.
NAV-Based Transactions
Units are bought and redeemed at the applicable NAV during the transaction window rather than through continuous market trading.

Mandatory Stock Exchange Listing

SEBI requires interval funds to be listed on a recognised stock exchange. However, trading volumes on exchanges may be limited, so many investors prefer using the scheduled transaction windows.
Minimum Gap Between Transaction Windows
There must be a minimum gap of 15 days between two transaction windows as per regulatory requirements.

Higher Expense Ratio

Some interval funds may have a relatively higher expense ratio than comparable open-ended schemes because they often invest in specialised or relatively less liquid assets.

Liquidity

Liquidity in an interval fund is limited compared to an open-ended mutual fund. Investors can redeem their units only during the announced transaction window. Outside these periods, redemption through the fund is generally not permitted, even if an investor is willing to pay an exit load.

Returns

The returns from an interval fund depend on the securities held in its portfolio, prevailing market conditions, and the investment horizon. Since many interval funds invest primarily in debt instruments, their return profile is generally linked to interest rate movements and the quality of underlying assets rather than short-term market fluctuations.
 

Benefits of an Interval Fund

Interval funds may suit investors looking for a structured investment approach with limited liquidity requirements.

• Access to Relatively Less Liquid Assets: The fund manager can invest in assets that may not be suitable for daily redemption-based schemes.
• Reduced Redemption Pressure: Since investors cannot redeem units every day, the fund manager can manage the portfolio with greater stability.
• Disciplined Investment Structure: Fixed transaction windows encourage investors to follow a planned investment and redemption schedule.
• Professional Portfolio Management: The portfolio is managed by experienced fund managers based on the investment objective of the scheme.
• Potential for Better Income Opportunities: Some interval funds invest in debt securities that may offer relatively higher yields than highly liquid instruments, depending on market conditions.
   

Types of Interval Funds in India

Although interval funds are available in different categories, debt-oriented schemes are the most common in India.

Debt Interval Funds

These funds primarily invest in fixed-income instruments such as corporate bonds, government securities, commercial papers, and certificates of deposit. They generally aim to generate regular income while managing interest rate and credit risks.

Hybrid Interval Funds

Hybrid interval funds invest in a mix of equity and debt instruments. The allocation between the two asset classes depends on the scheme's investment objective and risk profile.

Equity Interval Funds

These funds invest mainly in equity and equity-related securities. Compared to debt interval funds, they generally carry higher market risk and are less common in the Indian mutual fund market.
 

Interval Fund vs. Open-Ended vs. Closed-Ended Mutual Fund

Risks of an Interval Fund

Before investing in an interval mutual fund, investors should understand its limitations.

• Limited Liquidity: Units can generally be redeemed only during the specified transaction windows.
• Higher Expense Ratio: Some schemes may have higher expenses than comparable open-ended mutual funds.
• Limited Availability of Products: There is limited availability of interval funds in comparison to other mutual funds.
• Restricted Trading Opportunities: Investors cannot freely enter or exit the fund throughout the year.
• Market and Credit Risk: The rate of return depends on the nature of investment made by investors and market conditions.
   

Who Should Invest in Interval Funds?

An interval fund may be suitable for investors who:

• Have a medium- to long-term investment horizon.
• Do not require immediate access to their invested amount.
• Want exposure to debt-oriented investments with professional management.
• Understand the liquidity restrictions associated with interval funds.
• Are looking to diversify their investment portfolio.

Who Should Not Invest?

An interval fund may not be suitable for investors who:

• Need regular or immediate liquidity.
• Prefer the flexibility of redeeming investments on any business day.
• Have a very short investment horizon.
• Are uncomfortable with restricted transaction periods.

Taxation of Interval Funds

The taxation of an interval fund depends on whether it qualifies as an equity-oriented or debt-oriented mutual fund under the applicable income tax provisions.
 

Investors should review the latest tax provisions before investing, as taxation may change with amendments to applicable laws.

Things to Consider Before Investing in Interval Funds

Before selecting an interval fund, consider the following points:

• Check whether the transaction frequency matches your liquidity requirements.
• Understand the investment objective and portfolio allocation.
• Review the expense ratio of the scheme.
• Assess the credit quality of the underlying debt securities, where applicable.
• Compare post-tax returns with other suitable investment options.
• Ensure the investment horizon aligns with the interval structure of the scheme.
   

Conclusion

An interval fund combines selected features of open-ended and closed-ended mutual funds by allowing investments and redemptions only during predefined transaction windows. It may suit investors who have a planned investment horizon and do not require frequent liquidity. Before investing, review the scheme's investment objective, transaction schedule, risk profile, and tax treatment.