1. How do Interval Funds work?
Interval funds provide the perfect blend of both closed-end funds and open-ended funds. Similar to closed-end funds, you cannot buy/sell the units frequently in interval funds. These funds might be listed on a stock exchange like other closed-end funds. Fund houses may allow redemption during specified periods at prevailing Net Asset Value (NAV).
Interval Funds have a lot in common with fixed maturity plans (FMPs). Firstly, your money remains invested for a fixed tenure and the investment cannot be redeemed before maturity. The fund manager of these funds is better positioned to utilize the investments. He allocates your money in securities for a tenure which matches the fund’s maturity. This facilitates in a forming a robust investment strategy which delivers better returns.
2. Who should Invest in Interval Funds?
Interval funds have a unique feature of investing in illiquid assets which are not listed on exchanges. These assets may be in the form of forestry tracts, private assets, commercial property and business loans. Investors who are looking to get exposure to such unconventional assets may think of investing in Interval Funds.
3. Things to Consider as an Investor
Interval funds aren’t of much help in case of an emergency. They are completely illiquid. There are no secondary markets where they can be redeemed. Even if an investor is ready to pay the exit load, she can’t exit before or after the specific time period.
Interval funds are not the best instruments when it comes to returns. Most of the interval funds in India provide an annualized 5-year return of 6% to 8.5%. These returns when translated to shorter periods are very low when compared to other types of funds.
c. Investment Horizon
Interval funds are essentially meant for achieving short-term goals. Investors whose investment horizons match the maturity dates of interval funds can invest in them to earn short-term returns. You must have concrete goals to utilize lumpsum which interval funds give upon maturity.
d. Financial Goals
Since Interval funds are essentially fixed income schemes they are best suited for investors who are not sure about investment tenure. They are also suited for investors who are looking for lump sum amounts at a predetermined time. Investors can achieve this by matching their horizon with the time interval at which redemption is allowed. Also, since these are mostly debt oriented they don’t provide very high returns, these funds are suited for investors with low-risk appetite.
e. Tax Implications
Like any other mutual fund depending on the quantum of investments in debt or equity, they are taxed accordingly. If at least 65% of their portfolio is in debt they are treated as debt funds and if 65% of their portfolio is in equity they are treated as equity funds for tax purposes. Since most of the interval funds are practically debt-oriented, the long-term capital gains tax is applicable if the fund is held for 36 months or more.
Long-term capital gains are taxed at the rate of at 20% with indexation benefits. Indexation allows investors to be taxed on returns over and above the inflation rate by adjusting the purchase price of the securities for inflation. The Short-term capital gains form part of your income and are taxed as per your income slab.
4. How to invest in Interval Funds
You can invest in Interval Funds in a hassle-free and paperless way at ClearTax. Use the following steps to begin your investment journey:
Step 1: Create an account at cleartax.in
Step 2: Enter details of investment like the amount of investment and period of investment.
Step 3: Your e-KYC will be done in less than 5 minutes.
Step 4: Invest in your favorite interval fund from amongst the hand-picked mutual funds.
5. Top 5 Interval Funds in India
While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best interval funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 5 interval funds in India based on the past 1 year returns. Investors may choose the funds based on a different investment horizon like 5 years or 10 years returns. You may include other criteria like financial ratios as well.
|Fund Name||1 year||3 year||5 year|
|Reliance Yearly Interval Fund - Series 1||7.06||8.29||9.73|
|IDFC Yearly Series Interval Fund - Series II||6.29||7.89||-|
|UTI Fixed Interval Income Fund - Annual Interval Fund - IV||7.31||8.63||9.90|
|ICICI Prudential Interval Fund - Series VI - Annual Interval Plan C||6.79||8.00||9.54|
|Reliance Interval Fund - Annual Interval Fund - Series - I||6.57||8.12||9.29|
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.