Interval Funds
Interval funds are a unique category of investment funds that offer a mix of stability and controlled liquidity. They sit between open ended and closed ended funds. Investors cannot redeem their units anytime, yet the fund is not locked forever. Instead, redemptions happen at fixed intervals.
This structure allows fund managers to invest in long term, high quality assets without worrying about daily withdrawals. At the same time, investors get periodic opportunities to exit. This combination makes interval funds appealing to those who want access to specialised assets and are comfortable with limited liquidity.
What are Interval Funds?
Interval funds are mutual funds that allow investors to buy units at any time but permit redemptions only during specified windows. These windows may occur monthly, quarterly or annually depending on the fund’s structure.
During these intervals, investors can redeem a portion of their units at the fund’s Net Asset Value. Outside these periods, redemption is generally not allowed.
In simple terms, interval funds provide periodic liquidity rather than continuous liquidity.
How Interval Funds Work?
1. Purchase Anytime
Investors can invest in interval funds throughout the year. This makes entry easy and flexible.
2. Redemption Only at Intervals
Redemptions happen only during pre-announced intervals. Investors are informed well in advance.
3. NAV Based Pricing
Units are redeemed at the prevailing Net Asset Value during the redemption window.
4. Portfolio Composition
Because the fund does not deal with daily redemptions, it can invest in assets that are not easily traded such as:
- Corporate bonds
- Market linked debentures
- Structured credit
- Infrastructure projects
- Long term debt instruments
This approach can give interval funds the potential to generate steady returns.
Key Features of Interval Funds
1. Controlled Liquidity
Investors cannot redeem units daily. This reduces panic selling and protects the portfolio from sudden withdrawals.
2. Periodic Exit Option
Although liquidity is limited, investors still get planned exit opportunities.
3. Stable Investment Strategy
Since the fund manager has predictable cash flow requirements, they can focus on long term, yield generating assets.
4. Less Market Volatility Impact
Interval funds are insulated from daily market fluctuations because redemption pressure is not constant.
5. Transparent Operations
Redemption intervals, investment strategy and asset allocation are clearly disclosed.
Who Should Consider Interval Funds?
Interval funds can be suitable for investors who want:
- Steady income
- Exposure to long term fixed income or alternative assets
- Lower volatility
- Predictable redemption timelines
- Professional fund management
They are ideal for moderately conservative investors who do not require daily liquidity.
Benefits of Interval Funds
1. Better Yield Opportunities
Because these funds invest in assets that traditional mutual funds cannot hold, investors may get the benefit of higher yields.
2. Lower Redemption Pressure
The fund manager has the freedom to build stronger long term strategies.
3. Diversification
Interval funds add variety to an investor’s portfolio by including niche assets.
4. Protection from Panic Selling
Market turbulence does not immediately affect investor behaviour since redemption windows are fixed.
Risks and Limitations
1. Limited Liquidity
Investors must wait for the redemption period. This makes interval funds unsuitable for short term needs.
2. Interest Rate Sensitivity
Since the portfolio contains many fixed income instruments, rising interest rates may reduce fund value.
3. Credit Risk
Some funds may hold lower rated instruments for higher yields. This increases default risk.
4. Redemption Caps
During redemption intervals, the fund may limit withdrawals to a certain percentage of total units.
How Interval Funds Compare With Other Funds?
1. Open Ended Funds
- Daily liquidity
- Can invest only in easily tradable assets
- More impacted by market volatility
2. Closed Ended Funds
- Locked in till maturity
- No redemption intervals
- Traded on exchanges
3. Interval Funds
- Hybrid structure
- Controlled liquidity
- Long term asset exposure
This unique combination makes interval funds stand out in the mutual fund space.
Example to Understand Interval Funds
Suppose an interval fund announces a redemption window every quarter.
You invest ₹50,000 today. You can add more anytime. But if you want to withdraw money, you must wait for the quarterly window. During the window, you can redeem units at the current NAV. Outside this window, redemption is not possible.
This gives you the opportunity to plan your cash flow while allowing the fund manager to build a stronger portfolio.
Conclusion
Interval funds offer a thoughtful balance of limited liquidity and long term investment potential. They provide access to specialized assets that traditional mutual funds often cannot handle. For investors who prefer planned liquidity, lower volatility and potentially higher yields, interval funds can be a smart addition to a well diversified portfolio.
By understanding how these funds work and what risks to expect, you can make informed choices that align with your financial goals.
FAQs on Interval Funds
1. Are interval funds safe?
They are relatively stable because they invest in long term debt assets. However, they still carry interest rate and credit risks.
2. How often can I redeem my money?
Redemption happens only during the fund’s scheduled intervals which may be monthly, quarterly or annually.
3. Do interval funds offer guaranteed returns?
No. Returns depend on market conditions, interest rates and portfolio performance.
4. Are interval funds better than fixed deposits?
They can offer higher returns but come with risks that fixed deposits do not have. They also do not provide daily liquidity.
5. Can beginners invest in interval funds?
Yes, as long as they understand the limited liquidity and are investing for medium to long term goals.
