INTERVAL FUNDS

WHAT ARE INTERVAL FUNDS?

Interval funds are a type of closed-ended funds which offers liquidity to investors at said stated intervals - typically annually, semi-annually, and quarterly. This signifies that investors are able to sell a portion of their investment at regular intervals at a price based on the NAV. These funds may invest across a wide range of strategies, asset classes, and securities which defies a common myth around these funds is that interval funds relate to a single asset class such as private equity or real estate, or corporate credit, which neglects their potential for diversification.

WORKING OF INTERVAL FUNDS

Interval schemes are quite identical to the fixed maturity plans. The money of investors is invested for a fixed tenure and the investment can’t be redeemed prior to the maturity date. The fund manager, therefore, gets the opportunity to set a robust investment strategy in place, without taking the stress about redemption requests and liquidity. They will allocate the investor’s money in securities for a tenure that sues the maturity of the fund. 

FEATURES OF INTERVAL FUNDS

1. Not liquid:

These funds are not liquid in nature as their units can only be redeemed at certain specific time intervals defined by the plan.

2. Risk and returns:

Since investors can redeem units during the specified period, the liquidity risk is high. These funds can generate returns of around 6-8% in the long term whereas the returns are considerably low in the short term.

3. Expense ratio:

The expense ratio of these interval funds is generally more when compared to other types of mutual funds.

4. Investment plan and horizon:

If investors’ investment horizon matches the maturity date of the fund, then they can invest in it to earn short-term gains. Most schemes in this type of funds are debt-oriented hence it suits investors with low-risk tolerance and offers relatively less returns. 

WHO SHOULD INVEST IN INTERVAL FUNDS?

As we have gained a decent understanding of the interval funds, now let’s discuss if you should opt for this.

If you want to invest a lump sum corpus that may be redeemed at a particular point in time, these funds are a decent and ideal alternative. These funds are recommended to meet short-term financial goals within a specified period. Nevertheless buying such funds is not very complex, it may be expensive as fund houses may have a certain minimum investment requirement that may be very steep. These funds are also not liquid and hence not beneficial during contingencies. This is true even if you are ready to pay an exit load. If you are a moderate risk take or risk-averse investor, then these funds can prove to be an excellent mode of investment for you. 

TAXATION ON INTERVAL FUNDS

Like any other mutual fund plan, the interval funds are taxed depending on the quantum of investments in equity and debt. If at least 65% of the portfolio is in debt then it is treated as debt funds and if 65% of the portfolio is in equity then these are treated as equity funds for tax implications.

Debt Oriented 

1. The STCG(Short Term Capital Gains) are included in the income and taxed as per the applicable income tax slab to the investor.
2. LTCGs on debt-oriented hybrid funds are taxed at the rate of 20% after indexation benefits.

For debt, LTCG is applicable when you hold the securities for more than 3 years and STCG is applicable when it is held for less than 3 years.

On Equity Component

1. LTCG of more than Rs. 1,00,000 are taxed at 10% (without indexation).
2. STCG is taxed at 15%.

For equity, LTCG is applicable when you hold the securities for more than 1 year and STCG is applicable when it is held for less than 1 year.

COMPARISON BETWEEN INTERVAL FUNDS AND OTHER MUTUAL FUNDS

LIST OF FEW INTERVAL FUNDS

1. ABSL quarterly Interval Fund - Direct Plan - Serie IV
2. IDFC Yearly Interval Fund - Series I
3. Axis Yearly Interval Fund - Direct Plan - Series 1
4. Kotak Quarterly Interval Fund - Direct Plan - Series I
5. HDFC Quarterly Interval Fund - Retail Plan - Plan A