Mutual fund Unlocked: Interval Funds

Diversification is one of the most important things to focus on when you are investing in the mutual funds. The Indian mutual fund industry gives various options to investors, interval fund is one of these avenues which is lesser known. Let's understand what are interval funds and get familiar with these type of mutual funds.

Interval funds are funds which offer combined features of both the open-ended and closed-ended funds. This implies that the fund is open for sale or redemption during the periodic predetermined intervals of the time like monthly, quarterly, yearly. The investment strategy of these funds is nearly similar to the fixed maturity plans. These funds invest in the securities having maturity within the decided interval. To understand this let us assume that an interval fund scheme has an interval of 368 days. Then it implies that the fund will be closed for 367 days after that on 368th day or on the next business day of this interval it will be open for purchase and redemption for two days and then closed for the next 367 days again. In this way, the cycle of interval funds works.

The NAV of these schemes react to bond market movements just like FMP’s, however, the maturity value of these schemes are independent of the interest rate risk. If the issuer of the bond defaults, then only the NAV of these schemes fall significantly.

These funds are a good option for investors who require lump sum income at predetermined time intervals. These funds are capable of providing for short-term cash needs within a specific time period.

On the taxation front, these funds are taxed as per the investment. That is if the fund invests its major corpus, that is, 65% or more in debts then these funds are taxed as debt funds, vice versa if the major corpus is employed in equities, then these funds are taxed as the equity funds.