Is investment in interval mutual funds a good option?

As we know the interest rates are moving up, due to which the bond funds delivered not so good returns. Neither the open-ended long duration funds performed well, due to higher interest rate sensitivity nor the closed-ended FMPs (Fixed Maturity Plans), though FMPs have done marginally better. Even the shorter term bond funds have not so satisfactory returns in the past one year. Whereas, the interval funds, which is the combination of the open-ended and closed-ended funds, have been the best performers among the debt mutual funds segment with 6.7 per cent returns on an average in the past one year. Wherein during the past one-year long-term debt funds gave 4.6 per cent returns and short-term debt funds gave around 6.3 per cent on an average.

Interval funds are the FMPs with some slight difference between them. The difference being in the lock-in format. Interval funds being open-ended funds allow investors to make an additional purchase or redemption after a certain interval. For instance, an annual or yearly interval fund allows investors to purchase additional units or perform redemption, post initial investment, after 365 days. Interval funds being open-ended funds are open for initial subscription at any time.

As there is no mandatory redemption on maturity, investors can remain invested in interval funds for an indefinite period which also allows them to defer taxation beyond the stated interval.

The investment strategy adopted by the interval funds is the same as that of Fixed Maturity Plans. The underlying securities are held as per the interval of the plan. This means investors are not exposed to the interest rate fluctuations to the extent of the opted interval. But it is also important to check the credit quality of the underlying instruments that the interval fund is holding as although you may reduce the interest rate risk, you may still be exposed to credit risk.