What are interval funds?
An interval fund is an alternative type of investment in companies. They are classified with closed-end funds under the law, as companies in interval funds can offer to buy a certain number of shares from shareholders from time to time. The price offered to shareholders is based on the net asset value (NAV) at the time they purchased the shares. People who buy these funds are looking for high returns and are willing to accept the advantages and disadvantages that come with them.
What to know about interval funds before investing?
It is important to know that these funds are not like other funds such as mutual funds, closed-end funds, and exchange-traded funds (ETFs). Like any type of investment, interval funds have specific uses that can work in your favor or align with your investment goals. However, when not used for the right reasons, these funds can cost you money.
Fund repurchase offers:
Interval funds will offer to buy a certain number of your shares at specific times. These times are called intervals. The price is equal to the net asset value (NAV) of the fund. The purchase ratio depends on the fund but generally ranges from 5% to 25% of the fund’s assets for an investor. Purchase intervals are usually quarterly but can be semi-annual or annual.
Fund liquidity and selling shares:
Interval funds are illiquid, meaning they cannot be easily converted into cash. Just as the fund offers to buy some shares at specific times, you can only sell your shares at specific times.
Interval funds vs. closed-end funds:
Interval funds are classified with closed-end funds, but they are not the same. For example, they do not often trade in the secondary market. It is common for them to trade at the net asset value of the fund. Closed-end funds do not share this same characteristic.
Fund portfolio:
One unique feature of interval funds is that they tend to invest in a variety of assets that other types of funds may not hold. For example, these funds can invest in illiquid assets such as agricultural land and forests. They may also invest in alternative securities such as business loans and private equity funds.
Fund costs:
Expenses for interval funds are generally much higher than for open-end mutual funds, closed-end funds, and exchange-traded funds. Fees and expenses vary, but you are likely to pay management fees of up to 1.5% or higher, service fees of up to 0.25%, and more than 3.5% in annual fees. These costs are significantly higher than those associated with most mutual funds and exchange-traded funds. Front-end sales charges, broker commissions, and redemption fees may also apply to these funds.
Returns of interval funds:
The freedom to invest in alternative asset types and the restriction on investor withdrawals provide a greater opportunity for fund managers to deliver higher periodic returns to investors. They may experience higher returns and yields than they would with other types of funds.
Advantages and disadvantages of interval funds:
Now that you know the basics of these funds, you can decide if purchasing shares of this unique investment is a good idea. Like other types of funds, these funds have their strengths and weaknesses.
Advantages:
- Potentially higher returns than other types of funds.
- Access to alternative investments such as business loans and private equity funds.
- Periodic offers from the fund to buy shares at net asset value from investors.
Disadvantages:
- Illiquidity
Conclusion:
You can often take advantage of the most common benefits of investing in mutual funds or exchange-traded funds, including diversification, long-term growth, and income from dividends. If you’re looking for other attributes in a fund such as higher returns or access to different types of investments, interval funds may be a good way to achieve those goals.
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Source: https://www.thebalancemoney.com/what-is-an-interval-fund-4174102
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