Choosing interval funds over mutual funds

USA Herald

Kip Meadows

July 29, 2017


The average investor has a lot more options available to them these days than they did just a few short years ago. Our parents may have preferred the familiar mutual fund, but today’s investor has far more investment options, with the number of mutual funds triple what it was ten years ago, ETFs in abundance, and other options available to create  a more diversified portfolio. One alternative to the traditional mutual fund that is beginning to gain traction in recent years is the closed end interval fund. Closed end interval funds  offer some clear advantages over traditional open end mutual funds, but there are drawbacks. Deciding what to invest your money in can be a difficult decision and there really is no one right answer for everyone. An investor needs to understand their own financial position well  to make sound investment decisions.

Open vs Closed End Funds

Interval funds and mutual funds are both open investments in the sense that anyone with the minimum required initial purchase can purchase shares in the fund at any time. The big difference between the two is that an investor can sell their interest in a mutual fund at the end of any day the New York Stock Exchange is open,  while interval funds only accept redemptions at the end of each month or each quarter, depending upon how the prospectus is written.  This reduced liquidity can be a problem for investors that may need quick access to their assets during times of financial crisis.

A mutual fund is completely liquid. You can buy shares one day and sell them the next if that’s what you want to do. An interval fund, as its name suggests, only allows you to sell your shares during pre-set interval periods. Mutual funds are made up primarily of various stocks and bonds, whereas interval funds usually contain a lot of real estate holdings which require the security of a more long-term investment.

Mutual Funds Lower Minimums

If your initial investment level is limited,  a traditional mutual fund is much more accessible. The minimum starting investment in a mutual fund can be as low as $100 in some cases. You don’t have to have a lot of money in the bank to invest in a mutual fund. That is not always the case with an interval fund. They often require an initial investment in excess of $10,000. It’s still relatively accessible for the casual investor, but it will tie up a fair bit of cash for a set period. For the investor that wants to keep their assets as liquid as possible interval funds may not be the best option.

While interval funds are illiquid assets, they are still more open ended than other funds such as hedge funds. They’re a nice compromise for the investor that’s willing to tie their money up for a short period of time, but still wants to have ready access to it when needed. Some of these funds offer interval buyouts monthly. They may not have the same amount of liquidity as a mutual fund, but they do offer better returns and many investors view this as a fair trade off.

Interval Funds – More Risk, More Opportunity for Gains

Interval funds offer the opportunity for higher returns than the  average  mutual fund, by offering exposure to less liquid and often more volatile securities. Unlike mutual funds, interval funds  are not limited to 15% of their holdings in illiquid investments, such as real estate. By restricting the ability of fund members to cash out to set intervals, the fund manager knows they have access to a guaranteed pool of assets that they can use to make longer term investments in a measured and controlled way. This allows them to invest in commercial real estate and other such ventures that require some time to realize the type of return the fund manager is trying to achieve.

Understanding the Fees

Both interval funds and mutual funds have fees associated with them, but the fees for interval funds are typically higher due to the increased complexity of the investment strategies. It is always a good idea to learn about the fee structure of any fund before investing, and when a fund has higher fees to think through whether the additional fees are justified and in your comfort zone. The higher the fee, the greater the return the fund must achieve just to break even.

Interval Funds – Ideal for the Patient Investor

Mutual funds are a good investment for an investor that wants to always have the flexibility to access their assets whenever they need them. They offer decent and reliable returns and they don’t require a large initial investment. For the investor that wants larger returns though, interval funds are a better option. They do require a little more commitment, but by offering set intervals when investors can opt out of the fund they’re still flexible. If you can include interval funds as part of your investment portfolio they can provide substantial returns in a relatively short period of time.

See Kip’s original article in the USA Herald here.

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By |2022-03-11T15:54:35+00:00December 11th, 2018|
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