When building a long-term financial strategy, investors often find themselves choosing between high liquidity or consistent returns. But what if there was a solution that blends the strengths of both? Enter the interval mutual fund—a lesser-known but increasingly popular investment vehicle designed to give your portfolio exposure to alternative assets while controlling risk.
Whether you’re just beginning your investment journey or working alongside an experienced investment planner, understanding interval funds can help you make smarter, more balanced decisions. Let’s dive into how they work and why they may be worth your attention.
What Are Interval Funds?
Let’s start with the meaning of the interval funds. These are a type of closed-ended mutual fund that allow investors to purchase units at the Net Asset Value (NAV) during specific time intervals. Unlike open-ended funds (which offer daily liquidity) or closed-ended funds (which lock your money till maturity), interval funds strike a balance.
They operate under the interval scheme in mutual fund classifications as regulated by SEBI (Securities and Exchange Board of India). These funds invest in illiquid and long-term assets like real estate, unlisted equities, high-yield debt instruments, or infrastructure projects.
Since these are not traded on the stock exchange, the buying and selling of units happen only at designated intervals (usually quarterly, semi-annually, or annually), making them ideal for disciplined, long-term investors.
How Do Interval Mutual Funds Work?
An interval mutual fund functions differently from standard mutual funds. Here’s how the process works:
1. Subscription and Redemption Intervals
- Investors can buy units of the fund during a specific window.
- Redemption is permitted only during pre-specified intervals, such as every three or six months.
2. NAV-Based Transactions
- Purchases and redemptions are made at the prevailing Net Asset Value (NAV), avoiding the volatility of market-based trading.
3. Lock-In Periods
- Once invested, your capital is locked until the next redemption window. This discourages impulsive withdrawals and allows fund managers to invest in longer-term instruments.
Example:
Suppose a fund opens its redemption window every quarter. If you invest in January and want to redeem in February, you’ll have to wait till April when the next window opens.
This model offers fund managers flexibility to invest in illiquid but potentially high-yielding assets without the pressure of daily redemptions.
Benefits of Investing in Interval Funds
Interval funds are gaining popularity for good reason. Here are some of the most attractive benefits:
1. Access to Alternative Assets
These funds often invest in assets not easily accessible through traditional mutual funds, such as real estate, private equity, and infrastructure debt. This allows for portfolio diversification.
2. Reduced Volatility
The infrequent redemption structure shields the fund from daily market pressures, enabling fund managers to hold long-term positions without fear of panic selling.
3. Potential for Higher Returns
Because the underlying assets are long-term and illiquid, they may offer higher returns compared to conventional debt or equity funds—if held for the entire tenure.
4. Disciplined Investing
Limited liquidity discourages impulsive withdrawals and aligns investor behavior with long-term goals—especially important if you’re working with a retirement planner.
Risks and Limitations
Despite their advantages, interval funds also come with risks you should know:
1. Limited Liquidity
Unlike open-ended funds, you can’t withdraw your money anytime. This is a significant drawback if you need emergency access to funds.
2. Higher Expense Ratios
Managing illiquid and alternative assets often incurs more costs, which are passed on as higher fees to investors.
3. Complex Asset Valuation
It may be difficult for investors to assess the real-time performance of the fund, as many underlying assets don’t have a daily market value.
4. Not Suitable for Short-Term Goals
If your goals are immediate, such as buying a house or funding a vacation, this is not the right vehicle—unless you’re also using a tax planner to coordinate various instruments.
Who Should Consider Interval Funds?
Interval funds aren’t for everyone. They are best suited for:
1. Long-Term Investors
If you don’t need immediate access to your funds, interval schemes can offer steady growth over time.
2. High-Net-Worth Individuals (HNIs)
HNIs looking for exposure to alternative investments often use interval funds to diversify their holdings.
3. Financially Disciplined Investors
If you’re already familiar with portfolio management services or working with a financial advisor, these funds can be a valuable component of a well-rounded strategy.
Taxation on Interval Funds in India
Understanding taxation is essential before diving into interval funds.
1. Based on Asset Type
- If the fund primarily invests in debt instruments, the tax treatment will be as per debt fund taxation norms.
- If it holds equity assets, different rules may apply.
2. Short-Term Capital Gains (STCG)
Gains made within 3 years (for debt-based funds) are added to your income and taxed as per your slab.
3. Long-Term Capital Gains (LTCG)
For investments held beyond 3 years, gains are taxed at 20% with indexation benefits.
Consulting a professional about tax planning meaning in this context can help maximize post-tax returns.
How to Invest in Interval Funds in India
Investing in interval funds is simple but requires attention to timing.
1. Direct via Fund Houses
You can invest through the official website of the mutual fund company offering the scheme.
2. Online Platforms
Various online investment platforms list interval funds with information about subscription windows.
3. Through Advisors
A financial advisor or a platform like Fincart can guide you through fund selection, timing, and alignment with your financial goals.
Make sure your KYC documentation is up-to-date, and always read the offer document carefully before investing.
Performance Comparison: Interval Funds vs Other Mutual Funds
To better understand the value proposition of interval funds, it’s helpful to compare them against other popular types of mutual funds.
1. Interval Funds vs Open-Ended Mutual Funds
- Open-ended funds allow daily buy/sell based on NAV, providing high liquidity.
- Interval funds restrict redemptions to set periods, making them less liquid but more stable during market volatility.
- Open-ended funds are more suitable for investors with short-term liquidity needs, while interval funds suit those who can wait out market cycles.
2. Interval Funds vs Closed-Ended Mutual Funds
- Closed-ended funds lock in investment for a fixed term and are usually traded on stock exchanges at market prices (often at a discount).
- Interval funds offer limited liquidity windows at NAV, potentially providing a better exit value.
3. Interval Funds vs Fixed Deposits (FDs)
- FDs provide guaranteed returns but often fail to beat inflation.
- Interval mutual funds offer market-linked returns and access to high-yield instruments like infrastructure bonds or REITs—making them better for long-term capital appreciation, albeit with higher risk.
When managed correctly, an interval scheme in mutual fund structures can complement your core holdings by reducing overall portfolio volatility.
Key Considerations Before You Invest in Interval Funds
Before jumping into interval mutual funds, here are a few important aspects to evaluate:
1. Fund Strategy and Holdings
Always review the fund’s investment strategy. Is it tilted toward real estate, corporate debt, or infrastructure? Knowing this helps align the fund’s objective with your financial goals.
2. Redemption Terms
Check the frequency of redemption windows. Quarterly windows are standard, but some may offer only semi-annual or annual redemptions.
3. Exit Load and Expenses
Many interval funds levy an exit load during specific windows. Also, the total expense ratio (TER) can be higher due to the management of complex assets.
4. Historical Performance
While past performance isn’t a guarantee of future results, it can offer insights into how the fund navigated market cycles, especially during crises.
5. Minimum Investment
Some interval funds may have a higher entry threshold compared to open-ended mutual funds, so make sure it fits within your budget.
As with any investment, doing your due diligence—or working with a trusted advisor—is essential.
Interval Funds in India: Market Trends and Outlook
Interval mutual funds are still a niche product in India but are gradually gaining traction among sophisticated investors.
1. Regulatory Encouragement
SEBI has been encouraging diversification and transparency in mutual fund categories, which has made interval funds more structured and investor-friendly.
2. Rise in Alternative Asset Demand
Indian investors are increasingly looking beyond traditional equities and FDs. With interest rates fluctuating and market volatility becoming more common, the demand for products offering stability and higher yield—like interval funds—is rising.
3. Institutional Interest
Many institutions use interval funds to manage long-term obligations without worrying about frequent liquidity needs. This adds an extra layer of credibility and stability to the asset class.
4. Growing Retail Awareness
Thanks to digital investment platforms and financial education initiatives by companies like Fincart, retail investors are becoming more comfortable with lesser-known asset classes like interval funds.
In the years ahead, interval funds are likely to play a bigger role in Indian investors’ portfolios, especially as the focus shifts from just wealth creation to wealth preservation and sustainability.
Fincart’s View: Are Interval Funds Right for You?
At Fincart, we believe that every investment must align with your life goals, risk appetite, and timeline. Interval funds may not be as popular as SIPs or traditional mutual funds, but they offer unique advantages for the right type of investor.
If you’re already following a structured financial strategy with a retirement planner, or exploring avenues with a tax planner, interval funds can bring much-needed stability and diversification to your portfolio.
We also recognize that this type of investment isn’t one-size-fits-all. That’s why our advisors take a personalized approach, whether you’re looking for growth, income, or stability. Let Fincart help you navigate the complexity with clarity and confidence.
Conclusion
Interval mutual funds offer a smart alternative for those seeking diversification, reduced volatility, and access to high-yield instruments. While they come with liquidity constraints, they may provide greater stability and returns when aligned with long-term goals.
As financial products evolve, staying informed is crucial. Whether you’re a seasoned investor or someone planning their future with the help of a retirement planner, considering interval funds could be the next big step toward a resilient and rewarding portfolio.
Ready to explore interval funds or need guidance from a trusted advisor? Talk to Fincart’s experts today and discover tailored solutions for smarter, future-ready investing.
