What Is An Interval Fund? How Does It Function?

What Are Mutual Funds?

A mutual fund is an investment vehicle that combines investor funds and generates returns by investing in stock market-linked financial assets such as stocks and bonds. The fund’s aggregate holdings are known as its portfolio.

Imagine a nonstop bus named V1 that travels across India from city to city along a predetermined path. As with any other bus, V1 has a driver and numerous passengers. During the trip, some passengers board the bus if its itinerary covers their intended location, while others disembark upon arrival.

If we were to compare this to a mutual fund, the bus would be a mutual fund scheme, the route would be the fund’s purpose, the bus driver would be the fund management, and the investors’ funds would be the passengers.

V1 would go through a variety of locations, and at times, it would become trapped in traffic. There will be occasions when it travels on deserted highways, allowing it to attain high speeds. There is also a chance that the tires will become punctured.

Now, despite all of this, V1 will not cease. It will continue along its journey and ensure that it eventually reaches numerous cities. V1’s experiences are comparable to the volatility of the stock market. There will be occasions when the market declines, but it will eventually recover. V1 is an illustration of a single fund. Similar to how there are numerous buses traversing the country, there are numerous mutual funds with varying objectives and routes.

Structure of Mutual Funds

India has a very distinctive and robust mutual fund framework. The Securities and Exchange Board of India has enacted rules and regulations that govern the operation of each component entity (SEBI). SEBI was founded in 1992 with the purpose of protecting investor interests and regulating and promoting the growth of the securities industry. Regarding mutual funds, SEBI monitors and controls its operation.

There are numerous parties engaged in a mutual fund, but the fundamental structure consists of three tiers:

Sponsor, Trustee and Asset Management Company(AMC)

SEBI has designed this three-tiered system

• Sponsor: The Sponsor is the mutual fund’s promoter. When the Sponsor wishes to launch a mutual fund business, it must contact SEBI first. SEBI evaluates and verifies the eligibility of the sponsor in accordance with the predetermined criteria.

• Trust and Trustees: A mutual fund is established as a Trust, which includes the fund’s sponsor(s), Trustees, and asset management company (AMC). The Trustees are the protectors of investors in mutual funds. Their responsibility is to guarantee that all funds are handled in accordance with the stated aim and that investors’ interests are protected. They hire an asset management firm (AMC) to oversee the investors’ funds.

• Asset Management Company (AMC): The AMC is the third significant entity. The AMC is the money manager/investment manager/fund manager that manages investor funds for a fee. The AMC handles operations on a daily basis. The AMC introduces numerous mutual fund schemes to the market based on the demands of investors and the market’s characteristics, and also controls the development of these funds.

The basic design for a mutual fund scheme is submitted to SEBI for review and final approval. The AMC can only launch the scheme after receiving SEBI’s permission. SEBI has tight laws, regulations, and standards for conducting business, and the AMC must operate in accordance with them, in order to maintain integrity and confidence and prevent the exploitation of investor funds. In addition, the AMC manages operational functions such as customer support, accounting, marketing, and sales for the schemes.

What is an Interval Fund?

There are various sorts of mutual fund plans on the market. SEBI has categorized various sorts of programs to aid investors in their comprehension. In addition, this classification is based on the underlying investments, investment horizon, etc. This classification includes open-ended, closed-ended, and interval funds. This article will provide a comprehensive understanding of interval funds.

Interval fund is a mutual fund scheme that combines the characteristics of open-ended and closed-ended schemes, in which the fund is open for subscription and redemption only during certain specified transaction periods (STPs). In other words, Interval funds only accept Unit redemptions during STPs. Therefore, between two STPs, are comparable to closed-end schemes and must be registered on stock exchanges. However, unlike conventional closed-ended funds, interval funds lack a maturity date and are therefore open-ended. Consequently, one may remain involved in an Interval Fund for as long as one desires open-ended strategies. Thus, interval funds are similar to Fixed Maturity Plans (FMPs) with a rollover facility, as investments can be rolled over from one predetermined period to another.

Interval funds are mostly debt-oriented products, but some of them are equity-oriented whether they are equity or debt oriented is specified in the Scheme Information Document’s investment goal and asset allocation.

Like other mutual funds, interval funds are taxed based on whether the underlying portfolio is predominantly invested in stocks or debt instruments. If more than 65 percent of the fund’s assets are invested in debt instruments, the fund is taxed as a non-equity fund. Similarly, if the fund invests at least 65 percent of its assets in equities, it is taxed as an equity fund.

How Do Interval Mutual Funds Work?

Interval funds are a combination of closed-end and open-end mutual funds. These funds resemble closed-end funds, which cannot be redeemed prior to maturity. Additionally, certain funds may be listed on an exchange.

During particular time periods, fund houses may permit redemptions at the current Net Asset Value (NAV). In these funds, where the investment has a defined duration, the fund manager has the opportunity to develop a sound investing plan. They are not concerned with redemptions or liquidity. Therefore, they invest in securities with a duration that corresponds to the maturity of the fund and yields higher returns.

Features of interval funds

Here are a few key characteristics of Interval Mutual Funds in India:

• Risks and Profits

Since the units of an interval fund can only be redeemed within predetermined time intervals, they are highly illiquid. Therefore, even if you are willing to pay the exit load, you cannot redeem the units of these funds in the event of an emergency. Additionally, the units of these funds cannot be sold on any secondary market. Typically, interval funds earn returns of 6-8% over a five-year period. For shorter durations, returns are significantly reduced.

• Invest in accordance with your Investment Strategy

If your investment horizon coincides with the maturity date of the interval fund, you can invest in it to generate returns during the short period. Although interval funds can invest in both debt and equities, the vast majority of schemes are debt-focused. As a result, it appeals to investors with limited risk tolerance and provides relatively poor returns.

• Taxation

The taxation of these funds depends on the proportion of their underlying stock or debt investments. If at least 65 percent of the portfolio consists of debt instruments, the fund is a debt fund. Similarly, a fund is an equity fund if at least 65 percent of its assets consist of equity. Nonetheless, the majority of interval funds are debt funds. If the holding period exceeds 36 months, long-term capital gains (LTCG) are taxed at 20% with indexation benefit. If the holding period is less than 36 months, short-term capital gains (STCG) are taxed at the individual’s marginal income tax rate.

As an investor, you must carefully study the offer document and examine the scheme’s asset allocation to comprehend the tax rates. This can also help you design your portfolio investments based on your investment horizon and financial objectives.

Advantages of Interval Funds

Investing in interval mutual funds have been popular recently. The explanations can be found in the subsequent list of advantages linked with such funds.

• The yields of the interval funds can exceed those of the majority of debt funds.

• Investors in these funds have access to alternative assets of institutional quality, such as business loans and private equity.

• Periodically, investors can repurchase shares of interval funds from NAV.

• As compared to equity funds, low risk is linked with such funds, as they are often invested in debt instruments.

• Interval funds might be advantageous for investors seeking profits over a short period of time.

Disadvantages of Interval Funds

• Interval Funds imposed a maximum of 5% to 25% of the fund’s total assets for each liquidity window. If there are too many liquidity requests in a given session, each investor will receive a proportional share of the buyback amount.

• Despite their objective, they typically fail to ensure recurring liquidity. Some companies may assess “repurchase fees” of up to 2 per cent of the amount requested.

• Frequently, they must invest a portion of their capital in liquid assets such as cash, shares, or bonds in order to meet recurrent liquidity requirements. As a result, they cannot invest entirely in private investment vehicles.

• Interval Funds typically have a higher cost than traditional mutual funds, as do the majority of alternative investments.

Who should invest in Interval Mutual Funds?

Interval funds are appropriate for investors who wish to invest in unorthodox assets. Typically, these funds invest in illiquid assets that are not traded on stock markets. Include, for instance, private assets, forest land, loans, and commercial property. One may consider investing in these funds if they have a low-risk tolerance and short- to medium-term monetary objectives. However, the funds are locked for a specific time period. Therefore, it is not suitable for investors seeking liquidity immediately.

Conclusion

Contrary to popular assumption, interval funds do not offer daily redemptions; rather, they provide redemptions only at predefined “intervals,” such as monthly or quarterly. It is believed that interval funds can assist investors to acquire access to attractive private asset classes. This is true for interval funds. We thoroughly evaluate each product business manager, focusing on qualitative elements such as structure, staff, investment philosophy and process, etc., as well as past performance, risk, and fee information. The potential inclusion of interval funds in a portfolio is supported by extensive research and an understanding of their advantages and disadvantages.

FAQ

• Is interval fund a good investment option?

Although interval funds offer higher yields than typical mutual funds, they are also more expensive and less liquid. Interval funds may be a good investment if the investor does not seek liquidity and if the gains exceed the expenses, especially when compared to a typical fund.

• What is equity oriented funds?

A mutual fund that invests primarily in equity stocks is an equity fund. In India, according to the current SEBI Mutual Fund Regulations, at least 65 per cent of an equity mutual fund scheme’s assets must be invested in equities and equity-related products.

• What are debt funds?

Mutual funds that invest in fixed-income instruments such as bonds and Treasury bills are known as debt funds. Debt funds may invest in the Gilt fund, monthly income plans (MIPs), short-term plans (STPs), liquid funds, and fixed maturity plans (FMPs). In addition to these categories, debt funds also invest in short-term, medium-term, and long-term bonds.

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