The mutual fund investment industry is continually striving to introduce newer investment options its investors to enrich their portfolios. Interval funds are one such alternative type of closed-ended investments that are ideal for investors looking for higher yields. These funds are not listed on stock exchanges or other secondary markets and allow investors to sell or redeem units only during specified time intervals. Hence the name, interval funds. These intervals can be monthly, quarterly, half-yearly or yearly.

The article lists five things to consider before investing in interval funds.

1. Repurchase offers

When an investor buys interval funds, the fund offers to repurchase a certain percentage of the shares at the original NAV (Net Asset Value) at set intervals. Usually, this percentage is between 5% and 25% of the investors’ fund assets. The repurchase option typically comes every quarter, but some funds offer longer intervals too.

2. Liquidity

When you invest in mutual funds, you have the opportunity to sell your units anytime you require funds. But, with interval funds, you do not have this flexibility even after paying an exit load. An investor can redeem interval funds’ units only during the specific intervals.

3. Interval funds v/s closed-ended funds

Although interval funds are categorised as closed-ended funds, they share the characteristics of open-ended funds as well. For example, you can purchase shares at any time in an interval fund similar to an open-ended mutual fund scheme. Also, some features of closed-ended funds do not coincide with interval funds. For example, unlike closed-ended funds, interval funds trade at the fund’s NAV.

4. Holdings

Similar to the benefits of mutual funds, interval funds also offer unique advantages by investing in a diverse range of assets. These may include a mix of commercial properties such as forestry land or farmland tracts and other private equity funds or hedge funds. Thus, it is crucial to know the fund’s investment pool before investing in interval funds.

5. Expenses

Generally, the costs for interval funds are significantly higher than traditional mutual funds. The management fees can be 1.5% or higher, whereas service and annual fees can be up to 0.25% and over 3.5% respectively. Besides, you could have to pay redemption fees, broker commissions and applicable front-end sales charges.

Conclusion

When used appropriately, interval funds can be a lucrative addition to your investment portfolio. However, before you invest in interval funds, determine how much of your portfolio you can afford to put in this investment vehicle. Consider whether you may need funds in the short-term or can stay invested for the long term. Lastly, it is advisable to keep a close look at the costs associated with the products.

Alternately, you can invest in mutual funds online to diversify your investment portfolio and spread the market risk across different investment instruments for enhanced mutual fund benefits.

Binod Choudhary