Interval Fund - Meaning, Features & Taxation

The Securities & Exchange Board of India has long since made it its mission to encourage investors to make investments based on their unique investment goals and investor profile. In this respect, the promotion and popularity of mutual funds as routes for potentially profitable investment have grown rapidly. Every investor will likely find a mutual fund suitable for their needs and unique financial goals, not to mention their risk profile.  

In this regard, the interval fund has created waves with investors as it offers the flexibility of redeeming units when it suits investors who may decide on redemption at certain intervals to fulfill investment requirements. As an investor, you should know the nuances of all kinds of funds, the benefits and features offered by funds, and how they fit into your taxation model. Without further ado, then, let’s enter the world of interval funds.  

What are interval funds? 

Simply put, an interval fund falls within the broad range of mutual funds on offer in India. The fund may invest its capital in equities or debt instruments, or a combination of the two. The units of any interval fund can be bought or redeemed only at certain times, during specific intervals of time. The intervals in which the purchase of mutual fund units or the redemption of units can occur are determined by the fund house in question.  

You could say that interval funds are like certain closed-ended funds that have the feature of buying or redeeming units at particular times and not as frequently as other mutual funds may permit. Given this, before investors choose investment in any interval fund, they must check that it meets their requirements of liquidity related to intervals when units can be redeemed.  

How do interval mutual funds work? 

An interval mutual fund gives investors a potentially valuable blend of closed-ended mutual funds and open-ended mutual funds. Few mutual fund schemes are indeed launched as interval funds, but some are listed on stock markets and exchanges. Within the intervals set by the fund house, investors are allowed to purchase or sell mutual fund units at the existing net asset value (NAV). As the mutual fund house decides when mutual fund units can be redeemed, the mutual fund manager leverages potentially optimal investment options and creates a robust fund strategy free from any concerns for liquidity and unit redemption instructions. So, in an interval fund, more discretion may be given to the fund manager to effectively manage funds. Without interruptions of exits and entries, the fund manager can focus on allocating assets for investment in the fund and expect potentially lucrative returns for investors.  

Key Features of Interval Funds 

After you have understood the answer to the question, “What is an interval fund?”, you can go ahead and explore the appealing features of this kind of fund, listed below:  

• Risk/Gain 

With interval funds, investors can only withdraw/sell their units at particular intervals dictated by the said fund. This makes these funds lack liquidity. Hence, such funds have an element of risk in case you need emergency cash. Additionally, the units of interval funds cannot be sold for redemption in secondary markets. This can be a factor resulting in an interval fund’s unpopularity. However, as unconventional as interval funds are, they have their positive points.  

Concerning returns, an interval fund typically delivers gains in the 6%-8% range across a five-year period. Gains could be lower than this for funds invested in a shorter term. However, due to their redemption at specific intervals only, your investment in an interval fund is forced to potentially grow and this adds discipline to your investment. If you stay with interval funds long enough, you may turn a potential profit.  

• Plan Investments 

Every investor has an investment horizon in mind. This is the period in which investors would expect their initial investment to grow and make gains. In case this matches the intervals set by an interval fund, investors may consider investing. Furthermore, interval mutual funds invest in equity and debt instruments, but the debt component in such funds comprises a major portion of many of these funds. Therefore, interval funds are potentially suitable for low-risk investors who don’t mind relatively low returns.  

• Taxation on Gains 

The gains you may get from your investment in an interval mutual fund are liable for taxation as are any capital gains you receive from financial investments of most types. The tax you pay is based on the fund’s proportion of investment in equity and debt. An interval mutual fund that invests 65% or more of its total assets in equity-focused instruments or direct equity is liable for tax if any capital gains are realised. In case 65% or above comprise debt funds in an interval mutual fund, any gains achieved through such a fund are liable for taxation.  

To grasp the tax applicable to certain funds, it is imperative to read the mutual fund offer document before you invest. Based on your financial objectives and prospective returns, you can decide on a fund and whether taxation influences your gains to any degree.  

Benefits of Investing in Interval Funds 

An interval fund can offer a basket of advantages to certain investors and these are mentioned below:  

• High Return Potential: Interval mutual funds can deliver returns that outweigh more conventional mutual fund investment returns. Although they invest in low-liquidity assets, returns generated from these could be potentially higher over time.  

• Alternative Investment: A closed-end interval fund can offer investors ways to explore alternative investments with institutional grading. These may also include real estate or private debt. Furthermore, investors can likely make lower investments initially, compared to investing directly in such assets/investments.  

• Opportunities for Fixed Redemption: Interval funds offer redemption opportunities within fixed windows. However, some interval funds provide investors with buyback schemes at periods. Here, investors are permitted to buy back stock at the net asset value (NAV). This indirectly offers investors a way out of the investment fund, although this exit may be outside predetermined interval windows. Therefore, in an interval fund, you can expect some degree of liquidity, but this is done at the discretion of the fund house.  

Who should consider investing in interval mutual funds? 

Interval mutual funds are considered unconventional mutual fund investments. They may be given serious thought by investors seeking returns at specific periods,  aligned with their investment horizon and goals. Additionally, these funds are a potential match for investors looking for short-term gains with minimal risk in investment. Moreover, besides traditional debt instruments, interval funds also invest in assets such as forestry tracts, business loans, commercial property, and other unusual assets. Investors looking to explore unique assets may want to invest in interval funds. Finally, those investors who seek discipline in investment and wish to stay with a fund for a period may try interval funds.  

Conclusion 

Interval funds create a passage for investing in distinctive asset classes with periodic exit routes that are decided in advance by the interval fund house. The fund offers limited windows for the redemption of units but gives investors the option to invest in non-traditional assets like commercial property, private assets, and business loans. Furthermore, fund managers may pursue potentially optimal investment avenues without the distraction of exit or redemption requests from investors, giving them more leeway to invest and possibly achieve higher returns. Considered a niche investment choice, interval funds are gaining popularity with investors who have little need for liquidity and those who don’t mind venturing into uncharted asset investment territory.