What is An Interval Fund?

Understanding Interval Funds

An interval fund combines features of both open-ended and closed-ended schemes. The Securities and Exchange Board of India regulates these funds under specific guidelines.

Regular mutual funds let you buy or sell units anytime. Interval funds work differently. They allow transactions only during specific, predetermined periods. Fund houses call these periods "intervals" or "transaction windows."

Interval funds are open to investors over an established period of time. The length of the window will usually last from 2 to 3 days and will occur on a predetermined basis. During the window periods, investors can buy and sell their interests in the interval fund at the NAV of the fund at that time. During the interval months, the fund will be completely closed for any further trading.

SEBI has established clear regulations for interval fund operations.

• These funds must offer transaction windows at least once yearly. 
• Each window must remain open for a minimum of two working days. 
• Fund houses announce transaction windows 30 days in advance. 
• This notice period helps investors plan their transactions. 
• The announcement specifies exact dates when the fund opens for business.

How Interval Funds Work

Interval mutual funds create a middle ground between flexibility and stability. The operating cycle includes several distinct phases.

• The Fund Launch: The Asset Management Company launches the fund through a New Fund Offer. This initial period typically lasts 15-30 days. Investors can subscribe during this time.
• Closure Period: After the NFO for an interval fund has ended, the interval fund will be closed to all transactions. The fund managers will invest the funds they received in accordance with their investment plan.
• Managing Investments: Fund managers actively handle investments during closure. They face no redemption pressures. This freedom allows strategic allocation to potentially higher-yielding assets.
• Opening the Window: Transaction windows for interval funds are pre-determined. Upon opening, the transaction window will remain open for a time frame of 2-7 days. Investors have the ability to buy and sell units during this time.
• Processing Transactions: The fund processes buy and sell orders at the applicable NAV. If redemption requests exceed available cash, they may be processed proportionately.
• Closing Again: After the window closes, the fund returns to closed status. It remains closed until the next scheduled interval.

Types of Interval Funds

Fund houses categorise interval funds based on transaction frequency and investment focus.

Transaction Frequency Types:

• Monthly Interval: Funds open once each month
• Quarterly Interval: The most commonly used, funds open once every three months
• Semi-Annual: Funds open once every six months
• Annual: Funds open only once a year

Investment Focus Types:

• Debt-oriented funds primarily purchase various debt instruments
• Equity-oriented funds have a substantial portion allocated to equities
• Hybrid fund types include both debt and equity investments.

Most interval funds in India focus heavily on debt. They typically invest 70-100% in corporate bonds and government securities. Money market instruments and structured debt products complete the portfolio.

Key Features You Should Know

Interval funds have specific characteristics that set them apart from regular mutual funds. Understanding these features helps you decide if they match your investment needs.

Limited Access to Your Money

The main feature is restricted liquidity. You cannot access funds outside designated intervals. No provision exists for emergency withdrawals. Even penalties cannot override this restriction.

This differs from open-ended funds. Those funds allow early withdrawal with exit loads. Secondary market trading is also unavailable. You cannot sell interval fund units on stock exchanges.

Expected Returns

Interval Funds are typically designed with a medium-term target for annual returns of 6% to 8%. Ultimately, the actual returns will depend on several factors.

Returns for Interval Funds generally exceed traditional fixed-term investments. However, they fall short of the ultimate potential of equity funds. Conservative investors seeking moderate growth will find that the risk-return profile of Interval Funds suits their needs.

Tax Treatment

Taxation on Interval Funds is based on the portion of the fund that is invested in equity and the date of your investment. Understanding these rules will give you the ability to plan accordingly.

Equity-Oriented Interval Funds (≥65% equity):

Funds that maintain at least 65% in equity will generally be subject to equity tax treatment.

Debt-Oriented Interval Funds (<35% equity):

Most Interval Funds in India are debt-oriented in nature. However, the tax treatment of mutual funds changed significantly as of April 1, 2023.

• Capital gains are taxed according to your applicable income tax slab
• There is no distinction made between short-term and long-term capital gains
• Indexation benefits are not available

Conclusion

An interval fund offers a unique approach to mutual fund investment. It balances scheduled liquidity with investment flexibility. The structure benefits fund managers through reduced redemption pressures. Investors access potentially higher-yielding debt instruments.

However, interval mutual funds require careful evaluation. Consider your financial situation honestly. Assess your liquidity needs realistically. Understand your investment timeline clearly. Periodic investment liquidity works well for planned goals. It fails completely during emergencies.