The Pros and Cons of Investing in Interval Funds

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An interval fund is an alternative type of way to invest in a company. Grouped with closed-end funds by law, companies in interval funds may offer to buy back a certain amount of shares from the shareholders from time to time. The price that shareholders are offered is based on the net asset value (NAV) at the time they bought the shares. People who buy these funds are looking for high yields and are willing to accept the pros and cons that come with them.

What to Know About Interval Funds Before You Invest

It's vital to know that these funds are not the same as other funds, such as mutual funds, closed-end funds, and exchange-traded funds (ETFs). As with any type of investment, interval funds have certain uses that can work in your favor or with your own investment goals. Still, when not used for the right reasons, these funds can end up costing you money.

Here's what to know about interval funds before you invest.

  • Fund Repurchase Offers: An interval fund will offer to buy back a certain amount of your shares at set times. These set times are called intervals. The price is equal to the fund's net asset value (NAV). The percentage of repurchase depends on the fund but typically ranges from 5% to 25% of the investor's fund assets. Repurchase times are often quarterly but can also be biannual or yearly.
  • Fund Liquidity and Selling Shares: Interval funds are not liquid, which means that they are not easily turned into cash. Just as the fund will offer to buy back some of the shares at set times, you can only sell yours at set times.
  • Interval Funds vs. Closed-End Funds: Interval funds are grouped with closed-end funds, but they're not the same. For instance, they do not often trade on the secondary market. It's more typical for them to trade at the fund's NAV. Closed-end funds do not share this same trait.
  • Fund Holdings: One of the most unique traits of interval funds is that they tend to invest in a diverse range of assets, which may not be held in other types of funds. For instance, these funds can invest in illiquid assets such as farmland and forestry land. They may also invest in alternative securities, such as business loans and private equity funds.
  • Fund Costs: The expenses for interval funds tend to be much higher than open-end mutual funds, closed-end funds, and ETFs. Fees and expenses vary, but you'll likely pay management fees of 1.5% and higher, service fees up to 0.25%, and over 3.5% in yearly fees. These costs are far higher than the costs that come with most mutual funds and ETFs. Front-end sales charges, broker commissions, and redemption fees may also apply to these funds.
  • Interval Funds Yields: The freedom to invest in alternate types of assets and limit investor withdrawals offers a greater chance for fund managers to offer higher periodic payouts to investors. They may enjoy greater yields and higher returns than they would with other types of funds.

Pros and Cons of Interval Funds

Now that you know the basics of these funds, you can decide whether buying shares of this unique investment is a good idea. Like other types of funds, these funds have their good and bad points.

Pros

  • Higher potential yields than other fund types.
  • Access to alternative investments, such as business loans and private equity.
  • Periodic offers from the fund to buy shares at NAV from the investors.

Cons

  • Not liquid holdings, meaning that you can't redeem shares on demand.
  • More costly when compared to mutual funds, closed-end funds, and ETFs.

Bottom Line

Usually, you can receive the most common advantages of investing with mutual funds or ETFs, including diversification, long-term growth, and income from dividends. If you're looking for other traits in a fund, such as higher yields or access to other investment types, interval funds may be a good way for you to achieve these goals.

Article Sources

  1. U.S. Securities and Exchange Commission. "Interval Fund."

  2. U.S. Securities and Exchange Commission. "Closed-End Funds."

  3. Financial Industry Regulatory Authority. "Interval Funds—6 Things to Know Before You Invest."

  4. U.S. Securities and Exchange Commission. "Investor Bulletin: Interval Funds."