Interval funds provide access to diverse assets like real estate, private equity, and business loans. However, their limited liquidity and high fees make them an investment choice that requires careful consideration. Unlike mutual funds, they can only be sold at specific intervals, such as quarterly or annually, which may not suit investors needing quick access to cash. While they offer the potential for higher returns and portfolio diversification, their high minimum investment requirements and management fees can erode gains. Before investing, consider whether their structure aligns with your financial goals. A financial advisor can also help you assess if interval funds fit into your broader strategy.
How Do Interval Funds Work?
Interval funds are a relatively new investment option and can be challenging to access since they are not traded on public exchanges. Many are restricted to accredited investors, making them less widely available than traditional mutual funds.
Unlike stocks or exchange-traded funds (ETFs), interval funds can only be sold back to the fund itself at the current net asset value (NAV).
While investors can buy shares at any time, selling them is restricted to specific intervals set by the fund — typically quarterly or annually. When a repurchase window opens, the fund will buy back a limited percentage of outstanding shares, usually between 5% and 25%, meaning investors may not be able to redeem all the shares they wish to sell.
Despite their illiquidity, interval funds can be an effective way to diversify a portfolio. They often include alternative assets such as real estate securities, private equity, business loans and commercial property — investments that are typically not found in mutual funds. This diversification can contribute to higher potential returns, but it also requires a long-term commitment. Investors should carefully evaluate their need for liquidity before committing to interval funds.
Interval Funds and Real Estate
Interval funds offer real estate investment opportunities that mutual funds typically don’t. Commercial real estate investment is available through real estate investment trusts (REITs), but interval funds are a bit more hands-on.
While REITs put together a bunch of properties and are traded more like stocks, interval funds invest in the properties themselves. The National Council of Real Estate Investment Fiduciaries puts commercial real estate returns on par with the S&P 500. But interval funds bank on regular rental income from those properties, rather than on the value of the property itself.
Also, unlike REITs, interval funds aren’t generally affected by the ebbs and flows of trading. By their nature, shares in interval funds aren’t traded all that often.
Interval Funds and Fees
The cost of interval funds can be substantial. Minimum investments can start at $10,000 and drift closer to $30,000. Administrative expenses can be as much as 3% of an interval fund’s costs.
There are also a whole lot of fees associated with interval funds. Management fees can range from 1.5% to 2.45%. Redemption fees (2% of proceeds) can take an even bigger bite. Service fees (0.25%) and operating fees (more than 0.75%). Even before sales charges (some as high as 6%), a fund’s annual fees can come close to or exceed 4%.
By comparison, fees for mutual funds comprise 0.25% to 1.5% of an annual investment balance.
Potential Returns
A diverse group of assets and an illiquid structure with few redemptions can give interval funds a high rate of return.
A higher distribution rate may seem enticing to investors, who may want to earn more money without spending more of it. But higher fees can cut that rate of return. While the distribution rate for interval funds can exceed 5%, it doesn’t consist solely of income. Investors may want to see if that rate includes a return of principal or capital (the amount you invested) as well as capital gains, interest, or dividends.
Bottom Line
The diverse assets of interval funds might be enticing. Potential returns are also higher than other investments like mutual funds. Long-term growth can be rewarding, partially due to that diversification.
All investments carry some form of risk. You’ll want to check if interval funds carry enough possible reward for you. Since you can liquidate them only at intervals that the investment company sets, you’re stuck with them for a set amount of time. If you need capital in the short term, these may not be the right of investments for you. Before seriously considering these funds, take a look at your portfolio. If you have room for a long-term investment, research the investment asset and fees, and consider consulting with a financial advisor to see if they’re the right move for you.
Tips for Investing
- Before you jump to buy interval funds, you could always consider speaking with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area. You can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Not all investments are created equal, especially the many different types of funds available. With mutual funds, closed-end funds, index funds and ETFs, it’s important to know the difference between the such offerings. Get to know the various types of investments before jumping in.
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