Interval Funds Demystified: A Comprehensive Guide to Investing

Mutual funds offer diverse options, and a compelling category worth exploring is Interval Funds. Classified by the Securities and Exchange Board of India (SEBI), these funds introduce a novel investment methodology. This guide elucidates the nuances of Interval Funds, examining their types, advantages, and more.

Understanding Interval Funds:

Interval Funds, a unique category, may invest in equities, debt instruments, or a combination of both. Unlike open-ended funds, their units can be sold or purchased exclusively at predetermined intervals as declared by the fund house. This hybrid format merges features of both open-ended and closed-ended funds.

Operational Mechanism of Interval Mutual Funds:

1. Limited Redemption Intervals:
   • Investors are permitted to buy or sell units solely during designated intervals, offering the fund manager stability for strategic financial planning.
2. Similarities with Closed-ended Funds:
   • Resemble closed-ended funds where frequent trading of units is limited.
3. Listed Schemes:
   • Some interval funds could be traded on stock exchanges, enhancing accessibility and reach.

Suitability of Interval Mutual Funds:

Best suited for investors pursuing unconventional assets and possessing short-term financial objectives with low-to-moderate risk acceptance. Interval funds typically invest in exotic assets such as commercial properties, forestry tracts, and business loans.

Key Features of Interval Funds:

1. Risk and Returns:
   • High illiquidity due to redemption limits during non-interval periods. Returns usually span from 6-8% over a span of five years.
2. Investment Horizon Alignment:
   • Tailored for investors matching their investment duration with the fund's maturity date. Predominantly debt-oriented schemes, catering to those with lower risk tolerance.
3. Taxation Rules:
   • Taxation depends on the fund's asset distribution:
   • Equity Fund Taxation: If 65% or more is allocated to equity and equity-linked instruments.
   • Debt Fund Taxation: If at least 65% comprises debt instruments.

Note: It is imperative to thoroughly review the offer document to comprehend tax liabilities based on the plan's asset allocation strategy.

Who Should Consider Investing in Interval Funds:

1. Investors Seeking Unconventional Assets:
   • Optimal for those eager to diversify portfolios with unique and less conventional asset classes.
2. Short-Term Financial Goal Pursuers:
   • Perfect for investors with short-term financial objectives syncing with the fund's redemption intervals.
3. Low-to-Moderate Risk Tolerance:
   • Appeals to investors comfortable with low-to-moderate risk exposure.

Conclusion:

Interval Funds offer an unparalleled investment route for those seeking diversity and short-term gains. Despite inherent risks, their illiquid nature coupled with unique asset investments may benefit those with suitable risk tolerance and investment timelines. As with any financial decision, prudent assessment of your financial objectives and risk capacity is vital prior to investing in Interval Funds.