Unlike three year FMPs, interval funds give an option to investors to redeem after one year.
Fund houses are devising new strategies to overcome the game changing rules which have hit debt funds.
To provide a tax breather to investors who had invested in one year FMPs, fund houses provided an option to these investors to extend the tenure up to two more years. Then fund houses started offering three year FMPs.
However, one disadvantage of three year FMP is that it lacks liquidity. To tackle this issue, fund houses are planning to launch interval schemes. Reliance, Birla Sun Life and ICICI Prudential have filed offer documents with SEBI to launch interval funds.
Here’s how interval funds score over FMPs.
“In case of an FMP, getting approval for roll over is a tedious process where you need investor approval. In an interval scheme, you don’t need investors nod. For instance, if an investor has invested in an interval scheme he/she can choose to either auto roll over to two to three years or redeem the money. This option provides a liquidity relief to investors. Investors know that they can pull out money at least after a year,” Nikhil Kothari of Etica Wealth Management.
“Investors who don’t have visibility for three years can invest in interval fund for one year. Later, they can decide if they wish to continue or redeem. This is the advantage which interval funds have over FMPs,” said the product head of one of the fund house which plans to launch an interval fund.
Reliance has filed offer document for its Reliance Interval Fund – III (Series 1 to Series 10) scheme.
The scheme would invest in a diversified portfolio of central and state government securities and other fixed income securities which are maturing on or before the next specified transaction date of the scheme with the objective of limiting interest rate volatility.
Benchmarked against CRISIL Short Term Bond Fund Index, the scheme comes with three options - Series 366 and Series 367 days, Series 367 days and up to 1098 days, 1098 days and up to 1832 days. The scheme will not invest in real estate and airline sector.
Similarly, Birla Sun Life has filed for its Interval Income Fund-Annual Plan (XI-XX). This fund will offer ten plans. Each of these plans will have a separate portfolio. The scheme seeks to generate returns and growth of capital by investing in a diversified portfolio of debt & money market securities maturing on or before the term of the scheme.
However, interval funds have one disadvantage over an FMP. When investors chose to extend their tenor of investment in an interval fund, there is a reinvestment risk. “Interest rates can change hence there can be a re-investment risk while rolling over the money since the portfolios of each plan are different,” adds Nikhil.
“We are of the view that interval funds should not be considered if investors are clear about their investment goals and time horizon. This is because in the case of interval funds, investors have to keep a track of the dates when they can redeem their surplus. If the investor misses the redemption dates, the investments will be automatically renewed and he will have to wait for the next interval for his redemption to happen,” says Renu Pothen, Research Head, iFAST Financial India.
In interval funds, investors can buy or sell their units only during a specified transaction period (STP) announced by fund houses. The STP is usually declared at the launch of the scheme. Fund houses can change the STP date as per the prevailing market conditions. Investors also have an option to sell the scheme from the stock exchange route if they are holding units in demat form.
However, liquidity should not be the only criteria while choosing to invest in interval funds.
Vidya Bala, Head – Mutual Funds Research, FundsIndia.com says that instead of investing in interval schemes investors can invest in any open end short term debt fund if there is a liquidity requirement. “Interval funds can’t be an alternate to FMPs. For instance, if one year FMPs is rolling over to two years then the underlying risk of the scheme changes. One year FMPs invest in CDs and CPs while extending it to two years would mean investing in debentures and other securities.”
Vidya advises that investors with a low risk appetite should stick to FMPs. “FMPs have a mandate to hold till maturity while interval funds can change their investment strategy. Thus, FMPs score over interval funds when it comes to safety,” she adds.
