Introduction to Interval Income Mutual Fund Schemes

Published: December 27, 2016 at 2:59 pm

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An interval income mutual fund or more generally, interval funds is a lesser known class of mutual funds that are open for subscription and redemption only at specified time intervals. A discussion about their main features and how to use them.

An open-ended mutual fund allows purchase and redemptions on all business days. A closed-ended fund is “open” only during the New Fund Offer period. Thereafter, it is closed but can be transferred to someone else via the stock exchange. A Fixed Maturity Plan (FMP) is one of the well-known types of closed-ended mutual funds.

It is important to understand how FMPs work before looking at interval funds. Therefore, I would suggest that you first read How to Select Mutual Fund Fixed Maturity Plans (FMP) and then come back here.

An interval fund is one that is open for subscription only at the end of a specified interval period – monthly, quarterly or yearly or more.

In terms of investment strategy, it resembles a fixed maturity plan: choosing bonds that maturity on or before the interval duration.

For example, consider Birla Sun Life Interval Income Fund – Annual Plan IX. This has an interval of 368 days. Meaning, the fund will remain closed for 367 days after the NFP period is over. On the 368th day or the next business day, it will open for purchase and redemptions for two days. Then will be closed for 367 days and open again for two days and so on.

Like an FMP, although the daily NAV will react to bond market movements, the maturity value is independent of interest rate risk. However, it is subject to credit risk. If a bond issuer defaults, the NAV will fall – significantly.

To learn more about these risks,

Understanding Interest Rate Risk in Debt Mutual Funds

Understanding Credit Rating Risk in Debt Mutual Funds

Debt Mutual Funds: Credit Risk and Interest Rate Risk Can Co-exist!

List of Interval Mutual Funds

To get a list of interval funds, go to

https://www.valueresearchonline.com/funds/fundSelector/

Select Categories: Debt FMP

Exclude: Regular plans, Closed-ended funds and plans suspended for sales.

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interval-mutual-funds

You will see that there are different types of interval funds. Some hold cash (money market) and some corporate, PSU and bank bonds of varying credit quality.

Those who wish to invest in interval funds must read the scheme information document and understand the intended asset allocation and associated risks. An indicative return can also be calculated as described in the FMP selection guide above.

How to use Interval Mutual Funds

First, we need to recognise their lack of liquidity. Although they can be traded with a Demat account, this only remains a theoretical possibility Redemptions are possible only when the fund opens after the interval period.

In the case of an FMP, the duration is nowadays more than 3 years because of taxation benefits. In case, of interval funds, it can still be monthly or yearly.

One can but more units each month or each quarter as part of a long-term debt portfolio, but the lack of liquidity is a major disadvantage.  One can also use this to invest salary bonuses each year.

In essense, an interval fund is an FMP where the units do not mature and can be held for as long as one desires, and exit at the end of the designated interval. One can also add more units at that time. This can be more convenient than opening multiple FMPs. By choosing a shorter time interval (say monthly), the lack of liquidity can be tackled.

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