If you are looking for investment options beyond the standard open-ended mutual funds, interval funds could be worth considering. These unique schemes have distinct features that may suit a particular type of investor. Let's explore what interval funds are and whether they align with your financial goals.
What are interval funds?
Interval funds in mutual funds are a hybrid of open-ended and closed-ended funds. They can invest in equity, debt, or a combination of both. The key difference lies in the purchase and redemption of units. Interval funds have specific periods designated by the fund house where you can buy or sell units. Outside these intervals, your investments are essentially locked in.
How do interval mutual funds work?
Interval funds allow fund managers more flexibility compared to open-ended schemes. Since redemptions happen only at specific times, there's less pressure to keep a large portion of the fund in liquid assets. This enables the fund manager to invest in potentially higher-yielding assets and plan a long-term investment strategy without frequent buy/sell disruptions.
Features of an interval fund
Limited liquidity: The primary characteristic of interval funds is their limited liquidity. You can't redeem your units whenever you like.
Potential for higher returns: Due to their structure, interval funds can explore a wider range of assets, sometimes including illiquid assets, for potentially better returns.
Specific investment horizon: Alignment with an interval fund's maturity date is crucial. These funds work best when your financial goal has a timeline that syncs with the fund's structure.
Who should invest in interval funds?
Interval funds might be a good fit if:
You aren't concerned about immediate liquidity requirements and have specific future financial needs on your radar.
You have a low to moderate risk tolerance, particularly if the interval fund has a heavier debt fund focus.
You are intrigued by the prospect of gaining exposure to alternative, sometimes illiquid asset classes that interval mutual funds may invest in.
Things to consider as an investor
Comparing with FMPs: Interval funds share some similarities with Fixed Maturity Plans (FMPs). However, interval funds do have designated periods for redemption, while FMPs generally don't offer withdrawals until maturity.
Potential for listed funds: Some interval funds may be listed on stock exchanges, providing a potential avenue for liquidity outside the set interval windows, though this would depend on market conditions.
Understanding the nuances: As with any investment, research is key. Read the offer document to understand the interval fund's asset allocation strategy, the specific terms governing transaction periods, and any associated fees.
Interval funds: Proceed with informed awareness
Interval funds offer a distinct path within the mutual fund landscape. They blend aspects of open and closed-ended funds, catering to investors with defined goals and an understanding of the liquidity limitations. With a bit of research and the help of tools like mutual fund investment calculators, you can ascertain if this hybrid investment type is a fit for your portfolio strategy.
