Both are registered funds. Both are typically regulated investment companies issuing 1099s. Both are available without accreditation requirements at modest minimums.
The difference is a single design decision about redemption, and everything else follows from it.
The redemption rule and what it forces
A mutual fund is an open-end fund. It stands ready to redeem shares at NAV on any business day, with proceeds paid within a short statutory period.
That promise constrains the portfolio. Rule 22e-4 requires open-end funds to classify holdings by how quickly they could be converted to cash without significantly affecting price, and limits investment in illiquid securities. The logic is protective: a fund forced to sell hard-to-trade assets to meet redemptions realises poor prices, and the loss falls on the shareholders who stayed.
An interval fund is a closed-end fund that adopts a policy under Rule 23c-3 committing it to repurchase a stated percentage of shares at stated intervals — typically quarterly.
Because it does not promise daily redemption, it is not subject to the same illiquid asset limits. It can hold private credit, private real estate, secondaries, litigation finance, and other strategies whose returns depend precisely on not having to sell quickly.
That is the entire trade. The investor gives up daily access; the fund gains the ability to hold assets a daily-redeeming vehicle cannot.
Side by side
| | Mutual fund | Interval fund | |—|—|—| | Redemption | Daily at NAV | Periodic repurchase offer, typically quarterly | | Amount | Unlimited | Capped percentage, prorated if oversubscribed | | Illiquid holdings | Limited under Rule 22e-4 | Substantially permitted | | Pricing | Daily NAV | NAV struck for the offer | | Eligibility | Broad | Broad | | Tax form | Generally 1099 | Generally 1099 | | Expenses | Generally lower | Generally higher |
What the trade costs
Exit takes time and may take several cycles. If requests exceed the offer, everyone is prorated and must request again. A full exit from a fund experiencing sustained redemption pressure can take multiple quarters. See semi-liquid fund repurchase mechanics.
Price is not known when the request is made. NAV is struck after the request deadline.
Fees are generally higher, reflecting both the underlying strategies and the operational demands of running periodic repurchases against illiquid assets.
Valuation involves judgment. Illiquid holdings are fair valued rather than priced, and investors transact at those values — which makes valuation governance a fairness issue between shareholders rather than merely a reporting matter.
The liquidity sleeve is a permanent drag. An interval fund must maintain liquid assets against its repurchase offers. Those assets earn no illiquidity premium, so a portion of the portfolio is structurally not doing the thing the investor is paying for.
What the trade buys
Access to strategies that daily liquidity excludes. This is the whole point and it is genuine. An investor wanting private credit exposure in a registered, 1099-issuing, non-accredited-eligible wrapper has few alternatives.
A manager not forced to sell at the wrong time. A daily-redeeming fund facing heavy outflows must sell. An interval fund can decline to sell beyond its cap, which protects remaining shareholders from realising dislocated prices.
Fuller investment. Less cash held for redemption management than an open-end fund holding a comparable strategy would require.
The test worth applying
The useful question is not whether interval funds are good. It is whether the illiquidity is doing work.
An interval fund holding genuinely illiquid assets — private loans, private real estate, secondaries — is using the structure for its purpose. The liquidity constraint exists because the assets require it, and the investor is compensated through access to a return stream unavailable in daily-liquid form.
An interval fund holding assets that could be held in a mutual fund is asking the investor to accept a liquidity constraint and higher fees for no structural reason. That is a worse deal than the mutual fund, and it is worth checking rather than assuming.
The follow-up test is comparative: is a similar exposure available daily and cheaper? If a liquid alternative delivers most of the same return, the interval fund must justify both its constraint and its cost. If no liquid equivalent exists, the comparison is not really between two wrappers — it is between having the exposure and not having it.
Practical guidance
Use interval funds for exposures that genuinely require illiquidity, sized as long-term holdings, with the repurchase feature treated as a convenience rather than a liquidity plan.
Use mutual funds for anything that works in a liquid format, and for any capital that might be needed.
Do not size an interval fund position on the assumption that quarterly repurchases make it a cash substitute. The caps exist and they bind under exactly the conditions that would prompt an investor to want out.
Check the repurchase history before investing. A fund whose offers have never been prorated has a different practical liquidity profile from one that has been prorated repeatedly, and both are disclosed.
This guide is educational and general; it is not investment advice. Fund policies differ; review the prospectus for any specific fund.
Frequently Asked Questions
What is the main difference between an interval fund and a mutual fund?
A mutual fund redeems shares daily at NAV, which constrains how much illiquid assets it may hold. An interval fund repurchases only at stated intervals and only up to a stated percentage, which permits it to hold substantially more illiquid assets. The investor trades daily access for exposure to less liquid strategies.
Why can’t mutual funds hold illiquid assets?
Because they must meet daily redemptions. Rule 22e-4 requires open-end funds to classify holdings by liquidity and limits investment in illiquid securities, so that a fund can meet redemptions without selling assets at distressed prices and harming remaining shareholders.
Are interval funds more expensive?
Generally yes. Expense ratios tend to be higher, reflecting the cost of the underlying strategies and the operational demands of the structure. Some also have share classes carrying distribution costs. Whether the higher cost is justified depends on whether the strategy net of fees beats a liquid alternative.
Can I lose access to my money in an interval fund?
Access is limited rather than lost. Repurchase offers occur at the stated intervals, and if requests exceed the offer amount they are prorated, so a full exit can take several cycles. The capital is not frozen indefinitely, and it is not available on demand.
When is an interval fund the better choice?
When the strategy genuinely requires illiquidity to work and the investor genuinely does not need the money. If a comparable exposure is available in a daily-liquid vehicle at lower cost, the interval fund has to justify both its fees and its liquidity constraint.
Sources
- Investment Company Act of 1940, Rule 23c-3 (periodic repurchases) and Rule 22e-4 (liquidity risk management for open-end funds)
- Investment Company Act of 1940, Section 22(e)
- Internal Revenue Code Subchapter M (regulated investment companies)
