Investing in Interval Funds
Interval funds are investment companies that have been organized for the purpose of investing in securities. An interval fund's investments are pooled into one portfolio, and shares to the fund are sold to individual investors. Investors who own shares to an interval fund have ownership interest in the fund, but no direct ownership to the fund's underlying investment.
Interval funds get their name from the fact that they make periodic (i.e. interval) offers to buy their shareholders' shares to the fund. They purchase shares based on the net asset value of these shares at a specified date.
Interval Funds versus Traditional Closed-End Funds
Interval funds are closed-end funds. However, they have several characteristics that distinguish them from traditional closed-end funds. They are the following:
- Continuous public offering: Traditional closed-end funds offer their shares to public only once. Interval funds, on the other hand, are allowed to continue selling their shares to the public after the initial public offering.
- Direct redemption: Owners of shares to a traditional closed-end fund can usually sell their shares in the secondary market. In other words, sales transactions are made and executed between investors. Owners of interval funds' shares, on the other hand, can redeem their shares directly from the fund. Since interval funds make offer to buy shares at certain intervals, a shareholder need only wait for the fund to make the next scheduled repurchase offer to redeem his shares. Thus, interval funds' shares are rarely traded in the secondary market.
Repurchase Intervals for Interval Funds
An interval fund offers to buy back its shares from its investors on a predefined interval. Depending on the terms of the fund's initial offering, an interval fund's shares may be redeemed quarterly, bi-annually or annually.
An interval fund notifies its shareholders of upcoming repurchase intervals in advance so that shareholders who wish to accept the offer of repurchase can send in their confirmation well before the deadline.
While the interval fund has control over the frequency of its buy-back offers, its investors have control over whether or not they will redeem their shares. An interval fund can only offer to purchase shares from its shareholders. The decision on whether or not to sell shares back to the fund remains solely at the discretion of the fund's shareholders.
Interval Fund Expenses and Fees
Interval funds, like any other investment company, also charge other fees. The initial purchase of shares may come with a sales load to cover the broker/dealer's commission. Interval funds may also charge their shareholders administrative and management fees.
Investors should also note that if they accept the repurchase offer of the interval fund, they may be charged a redemption fee amounting to no more than 2% of the sales proceeds. This fee is charged by the interval fund to cover the administrative costs of repurchasing shares.
Interval funds should notify their shareholders about a repurchase offer at least 21 days but no more than 42 days before the repurchase request deadline. This notification should include the following information, among others:
- The statement that a repurchase offer is being made at net asset value.
- The NAV 7 days before the notification date, and an explanation on how to determine applicable NAV at the time of repurchase.
- The repurchase offer acceptance deadline, the date for determining the repurchase price and the date when payment can be expected from the fund.
- Disclosure of repurchase fees, including applicable redemption fees, as well as the risks of NAV fluctuation in the period between the repurchase request deadline and the repurchase pricing date. If an earlier pricing date is used, a disclosure should also be made to this effect.
- Situations wherein the interval fund company may postpone or suspend repurchase offers.
- The procedures and circumstances wherein the interval fund may repurchase shares on a pro rata basis.
- The steps that shareholders may take to tender their shares and the right of the shareholders to withdraw or modify their tenders before the repurchase request deadline.
If you are thinking of investing in interval funds, you should always do your research beforehand. Read recent shareholder reports, the fund's prospectus, the fund's press releases, and other materials so you can learn as much as you can about the fund. Research the interval fund's past performance, underlying investments, repurchase intervals, repurchase terms, and fees.
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