In an interval fund, an investment company will regularly offer to repurchase shares from shareholders. Those repurchases come at various intervals, hence the name. Before you decide to invest in interval funds, though, it’s worth considering how they function and what to expect.
How do Interval Funds Work?
These types of funds are relatively new and can be somewhat difficult to access. They aren’t traded on a securities exchange, and many are only be sold by accredited investors.
When sold by the fund itself, interval funds are sold at the current net asset value (NAV) set by the fund. They can be purchased at any time, but are illiquid. That means you can only sell them at specific intervals. Depending on the fund, you may only be able to sell shares quarterly or annually.
You have to accept the repurchase offer and the percentage of outstanding shares the fund will buy – between 5% and 25% — by a specific date. There’s also no guarantee you turn in the number of shares you when redeeming them.
However, interval funds can be an easy way to diversify your portfolio. Fund assets often include real estate securities and private equity funds. They also contain other investments such as business loans and commercial property. That diversity can help yield a higher rate of return. But you should be prepared for a long-term investment.
Interval Funds and Real Estate
Yes, 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
Interval Funds: 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.
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. If you can still come out ahead on the yield, perhaps consult a financial advisor and see if they’re the right move for you.
Tips for Responsible Investing
- Before you jump to buy interval funds, consider talking to a professional first. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will 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 into them.
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