What Are Interval Funds?

An interval fund is a type of closed-end fund with shares that do not trade on the 澳洲幸运5开奖号码历史查询:secondary market. Instead, the fund periodically offers to buy back a percentage of outstanding shares at 澳洲幸运5开奖号码历史查询:net asset value (NAV).

The rules for interval funds, along with the types of assets they hold, make this investment largely illiquid compared with other funds. High yields are th🔯e main reason investors are attracꦗted to interval funds.

Here is a closer look at these investments. 

Buying Is Easy But Expensive

Interval fund shares are usually offered for sale daily by the fund at the current net asset value. Depending on the fund and its guidelines, shares may be restricted to 澳洲幸运5开奖号码历史查询:accredited investors, but most ♌interval funds are available to 🔯anyone.

澳洲幸运5开奖号码历史查询:Minimum investments are often $10,000 to $25,000 and have 澳洲幸运5开奖号码历史查询:expense ratios as high as 3%. 

Interval funds are quite often consolidated 澳洲幸运5开奖号码历史查询:business development companies ไ(BDCs) that shifted their structure and allowed them to low🐻er their fees.

Limited Selling Opportunities

By rule, interval funds periodically offer to repurchase shares of the fund at the stated NAV. The repurchase period can be every three, six, or 12 months. Most funds offer to repurchase quarterly.

The repurchase announcement will specify a date by which you must accept the repurchase offer and the percentage of all outstanding shares the fund will buy; usually 5% and sometimes up to 25%. Since repurchase is done on a pro rata basis, there is no guara♈ntee you can redeem the number of shares you want during aဣ given redemption.

Because of these restricted selling opportunities, an interval fund should 🐓be considered a long-term, mostly illiquid investment.

Yields Are High...

Thanks to a largely illiquid structure, which allows 澳洲幸运5开奖号码历史查询:fund managers to invest without the pressure of ongoing redemptions, interval funds tend to provide higher returns than 澳洲幸运5开奖号码历史查询:open-end funds.

The ability to invest in 澳洲幸运5开奖号码历史查询:alternative types of assets, such as commercial real estate, consumer loans, debt, and othe🅷r illiquid assets, also helps increase interval fund yields.

...And So Are Fees

Overall fees for interval funds tend to be much higher than those for open-end mutual funds. A fund can start with a 5.75% 澳洲幸运5开奖号码历史查询:sales charge, a 澳洲幸运5开奖号码历史查询:management fee of up to 2.45%, a 0.25% 澳洲幸运5开奖号码历史查询:servicing fee, and as much as 0.75% in 澳洲幸运5开奖号码历史查询:operating expenses.

Not counting the sales charge, annual expenses for this fund ꦇcould be as much as 3.45%. Annual returns can and do exceed fees, but investors need to know that the bar is often high.

Commercial Real Estate Funds

One alternative investment class made available through interval funds, commercial real estate, deserves special mention. As opposed to 澳洲幸运5开奖号码历史查询:real estate investm𓆉ent tru꧅sts (REITs), which invest in property pools and trade l🦩ike stocks, interval funds invest directly in the properties themselves.

Interval funds tend to be less volatile than REITs, which are sensitive to interest rate changes and subject to the whims of the market. That’s partly because real estate-based interval funds rely more on steady rental income than on capital appreciation.

Pros and Cons of Interval Funds

In deciding whether these investments🐬 belong in your portfolio, you may consider this list of pros and cons.

Pros

• Returns on interval funds are significantly higher than those of open-end mutual funds.
• The illiquid, long-term structure of interval funds helps restrict normal investor “buy high/sell low” behavior.
• Interval funds provide retail investors with access to institutional-grade alternative investments with relatively low minimums.
• Funds are often less volatile and market reactive since investments are not tied to equities.

Cons

• Interval funds are essentially illiquid, especially compared with open-end mutual funds.
• Since repurchase is done on a pro rata basis, there is no guarantee you can redeem all of your shares during a redemption window.
• Although yields are higher, so are fees; much more so than with open-end mutual funds.
• The minimum investment, which is low by 澳洲幸运5开奖号码历史查询:private equity standards, is still high when compared with the minimum for open-end mutual funds.
• There is both transparency and conflict-of-interest issues if the 澳洲幸运5开奖号码历史查询:portfolio manager is allowed to invest in other funds of the fund sponsor.

The Bottom Line

The main advantage of inꩵterval funds is that they offer higher yields than most other mutual fund options. The two main disadvantages are higher fees and 🍌illiquidity. As noted above, illiquidity can be a positive if it forces you to keep an investment long-term.

Before investing in an interval fund, you should consider what portion of your portfolio could tolerate the long-term commitment required for this type of vehicle. You should also carefully research any inteꦰrval funds that interest you to make sure the fees are not likely to eat up any yield advantage.

Finally, you should consult with a trusted financial advisor to make sure you have not overlooked potential traps and that an interval fund makeꦅs sense for you.