Interval Funds: Finding a Balance Between Flexibility and Stability
Interval funds offer investors the flexibility to invest in equity and debt instruments. This flexibility helps create a diversified investment portfolio. The funds get their name because of their distinct feature that allows investors to sell or buy units only during specific time intervals as announced by the asset management companies (AMCs).
This is in stark contrast to open-ended funds, where transactions can take place daily without restrictions. Similarly, interval funds are different from closed-ended funds, where only a fixed number of shares are available but there is flexibility when it comes to redemption. With interval funds, investors can easily access a wide range of assets. They may also offer stability due to their predetermined transaction periods.
Decoding How Interval Mutual Funds Work
Interval funds offer the perfect balance between open-ended and closed-ended funds. During the predetermined transaction windows, investors can freely buy or sell units at their net asset value (NAV). Since the AMCs are in charge of determining the transaction windows, fund managers can create strategies without having to worry about sudden liquidity or redemption requests.
Who Should Invest in Interval Mutual Funds?
As explained above, interval funds are special types of funds that investors cannot buy or sell quickly. Investors have to wait for a particular time to sell these units. This makes interval funds ideal for long-term investors who are willing to wait to sell their shares during scheduled repurchase offers. Interval funds are also suited to investors who have a moderate risk appetite and short-term financial goals.
Pros:
- Higher Yield: The primary benefit of interval funds is that they have the potential of offering higher yields compared to many other mutual fund options.
- Less Volatile: Funds are typically less reactive to market fluctuations. The reason being investments are not only tied to equities.
- Investor Behaviour: The long-term structure of interval funds helps discourage typical investor behaviour of ‘buying high and selling low.’
- Limited Liquidity: Interval funds allow investors to sell or redeem units only at certain predetermined windows of time. When faced with emergencies, investors would not be able to redeem the units. Similarly, the units of interval funds cannot be sold in any secondary market.
- Redemption Possibility: As repurchase occurs on a pro-rata basis, there's no guarantee that investors will be able to redeem all shares during a redemption window.