Interval Funds: A Simple Guide to a Different Way of Investing

Have you ever wanted to invest in the same things as large organizations, like hedge funds or pension plans? For a long time, most everyday investors could not invest in things like private real estate, business loans, or private companies. But a type of investment called an interval fund is becoming more popular because it makes these opportunities possible.

If you have never heard of them, you are not the only one. Let's explain what interval funds are, how they work, and what you should know before you think about adding them to your investments.

What Are Interval Funds, Anyway?

Basically, an interval fund is an investment fund that pools money from many people to buy a mix of investments. What makes it special is that it combines parts of other funds you might know, like mutual funds and closed-end funds.

You can think of it as a hybrid. Like many mutual funds, interval funds are always for sale, which means you can usually buy new shares on any business day at the fund's current price. But unlike mutual funds that you can sell any day, interval funds have a special rule: you can only sell your shares back to the fund at planned times, or "intervals."

How Do Interval Funds Work? The Power of the Interval

The name "interval fund" comes from its main feature: regular offers to buy back shares. Here’s a simple guide to how it works:

• Scheduled Buybacks: The fund must offer to buy back a certain amount of its shares from investors on a regular schedule—usually every three, six, or twelve months.
• Limited Buybacks: These offers are for a limited amount, usually between 5% and 25% of the fund's total shares.
• Selling is Your Choice: As an investor, you do not have to sell your shares during these times. You can choose to stay invested.

This is done on purpose. Because the fund manager does not have to worry about investors selling their shares every day, they can invest in assets that are not easy to buy or sell. This leads to an important idea: illiquid assets.

Investing in Hard-to-Reach Places: Illiquid Assets

Illiquid assets are investments that you cannot quickly turn into cash without losing some of their value. Think of things like commercial real estate, loans to private companies (known as private debt funds), or shares in private businesses (private equity). These are usually long-term investments that you cannot just sell on a stock exchange.

Regular mutual funds can only invest a small amount in these types of assets—usually no more than 15%. Interval funds do not have this same rule. This gives them the freedom to invest in these alternative investments that can possibly earn more money. This access is one of the main benefits of interval funds.

How Do Interval Funds Compare to Other Funds?

To really understand interval funds, it helps to see how they compare to more common types.

Interval Fund vs Mutual Fund

The biggest difference is about liquidity—how easily you can get your money back.

• Liquidity: Mutual funds let you sell your shares on any business day. With an interval fund, you have to wait for the next buyback offer. So, are interval funds liquid? Not in the usual sense; they are thought of as semi-illiquid investments.
• Investments: Because they do not need cash ready for daily cash-outs, interval funds can invest more in those long-term, hard-to-sell assets we talked about.

You can buy shares of both fund types at their net asset value (NAV). The NAV is the fund's per-share value, found by taking the total value of the fund's assets, subtracting its debts, and dividing by the number of shares.

Interval Fund vs Closed-End Fund

By law, interval funds are a type of closed-end fund, but they work very differently.

• Trading: Regular closed-end funds sell a set number of shares that then trade on a stock exchange, like a stock. Interval funds usually do not trade on an exchange.
• Price: When you sell shares of an interval fund, you get the NAV. Closed-end funds that trade on an exchange can have prices that are higher or lower than their NAV.
• Liquidity: With an interval fund, you have sure (but limited) chances to sell your shares back to the fund. With a regular closed-end fund, you have to find someone to buy your shares on the stock market.

The Pros and Cons of Interval Funds

Like any investment, interval funds have good points to consider, but also important downsides to know about. Here is a look at the pros and cons of interval funds.

Potential Advantages:

1. Access to Alternative Investments: Interval funds let everyday investors own types of investments that used to be only for very wealthy people or large companies.
2. Potentially Higher Returns: Hard-to-sell investments often have the chance for higher profits as an exchange for not being easy to access.
3. Diversification: These different assets may do differently than the usual stock and bond markets, which can help spread out the risk in your investments.
4. Simplified Tax Reporting: The fund usually sends investors a Form 1099 for taxes, which is simpler than the K-1 forms that often come with private investments.

Potential Disadvantages:

1. Limited Liquidity: This is the most important one. You cannot just sell whenever you want. If you need your money quickly, an interval fund is not a good choice.
2. Higher Fees: Interval fund fees and costs are usually higher than those for mutual funds or ETFs. This is partly because it costs more to manage more complex, special assets. You might see management fees, service fees, and even fees of up to 2% when you sell.
3. No Guarantee to Sell All Your Shares: If more investors want to sell their shares than the fund offered to buy, the fund may buy back shares by spreading the offer out evenly. This means you might only be able to sell some of the shares you wanted to.

Is Investing in Interval Funds Right for You?

Investing in interval funds needs careful thought. They are made for long-term investors who can handle more risk and do not need fast access to their money. Before you invest, you must read the fund's main documents to fully understand its plan, investments, fees, and the specific rules of its buyback offers.

Interval funds can be a good way to add unique and possibly rewarding investments to your portfolio. By understanding how they work and thinking about their special features, you can make a smart choice about whether they fit your financial goals.