Called an interval fund, it gives regular investors access to investments that have typically been the province of financial institutions and the ultra wealthy, such as venture capital, private credit, and private equity. Created in the ’90s, the funds started growing in popularity following the 2008 financial crisis, according to Morningstar, and total assets under management have grown almost 40% per year over the past decade to $80 billion through May 2024—”bucking the trend,” as Morningstar says, of “persistent outflows from most actively managed strategies” over the past few years. The financial services firm credits this increase to near- and current retirees looking for a greater return than public markets alone can get them.

“We don’t usually see that type of growth in our industry,” Brian Moriarty, Morningstar’s associate director of fixed-income strategies and author of a report on the funds, tells Fortune. “It doesn’t come up that often unless it’s Nvidia.”

So what is the appeal? While normal mutual funds cannot invest more than 15% of their assets into illiquid investments, interval funds don’t have that restriction. So investors have access to private real estate, private equity, and more, and potentially higher yields than can be gained in public markets. Their increased popularity is part of a recent larger rise in appetite for non-traditional investments yielding higher returns, particularly among wealthy investors.

Some include the Cliffwater Corporate Lending Fund (CCLFX), the biggest interval fund, according to Morningstar, and which invests in private credit, and the PIMCO Flexible Real Estate Income Fund (REFLX), which invests in public and private commercial real estate markets. The funds can yield between 9% to 11%, per Morningstar.

They also have a number of drawbacks, perhaps most significantly for the average investor being their illiquidity. While investors can buy into the funds whenever they want, they cannot sell any day they choose, like with a standard mutual fund or stock holding. For that reason, they are best suited for guaranteed long-term investments.

“They are easy to get into but not easy to get out of,” says Moriarty.

That said, their growing popularity—and the fact that big names like Capital Group, the world’s largest active manager, T. Rowe Price, and Wellington are entering the space, an indication that other asset managers may soon follow suit—mean more investors will start considering adding interval funds to their portfolio—or be pressured by their advisors to do so. Here’s what to know before you do.

How interval funds work

Interval funds are closed-end funds that work much like mutual funds do, but do not trade on a public exchange. But whereas with a standard mutual fund shareholders can sell on a daily basis, with an interval fund they are locked in, with redemption available on a quarterly basis (though the exact interval can vary).

The rationale there is to provide some stability for the underlying alternative assets investors are buying into, which are less liquid than a standard stock would be. Another difference: shareholders can only collectively redeem a certain percentage of the shares in a single interval—usually around 5%—meaning it would likely be difficult for one individual to sell all of her shares at one time.

That means that the assets cannot be tapped easily; depending on the investment, it could take years to fully divest.

“You can buy them every business day, the experience feels a lot like a mutual fund,” says Moriarty. “But that is also the risk. It certainly does not feel like a mutual fund when you are trying to sell.” 

The complexity and restrictions of an interval fund may outweigh its benefits for many investors, Moriarty says.

“Interval funds might be good vehicles for investing in illiquid assets, but they should also be considered illiquid themselves,” he writes in the company’s investment guide.

What interval funds give investors access to

Most interval funds invest in assets that produce regular income, like bonds. That said, other interval funds invest in private equity, venture capital, fine art, or other alternatives.

It’s important to understand what the fund can offer you, says Moriarty—and what works best within the structure. Private equity, for example, may not be the best use case. While average investors may want exposure to it, there are other factors that could make it more complicated (like long lock-up periods) and sour the experience.

“The most common use case is just income generating assets. You can get more yield in this than with an ETF, and they are more suited for the interval fund wrapper,” he says. “Maybe liquidity isn’t great but they can still be sold in a month, that’s all you need. I think we’re going to end up seeing a narrowing in the kinds of strategies that are offered.”

Proponents of interval funds say they give investors an edge in an environment where the standard 60/40 stock-bond portfolio split may no longer be optimal. That said, Moriarty says they’re not intended to replace equity holdings completely.

“They’re not going to become 50% of your portfolio. It’s just not what they are for, it’s not how they should be used,” he says. “They can be part of a diversified portfolio because they are filling a particular need for that portfolio. But they are not going to replace the 60% equity in a 60/40 portfolio.”

How to invest in an interval fund

An investor can typically buy into an interval fund via a registered investment advisor or directly with the fund company (and a few of the funds are limited to accredited investors, whether they have an advisor or not). There are often investment minimums, ranging from around $2,500 to $5,000.

Fees vary as well, but average 2.49%, according to Moriarty’s report. That’s compared to 0.58% and 0.99% for ETFs and mutual funds, respectively.

“Without very strong returns, that kind of price tag could still eat up a chunk of the liquidity premium expected from assets in an interval fund,” he writes.

Bottom line

All of this said, the average investor is likely better off forgoing them, unless they have a sophisticated understanding of the funds and their use cases, says Moriarty.

“The degree to which they are likely to enhance long-term portfolio returns is at least open to debate,” he writes. “If all an investor is looking for is amplified return, then it might be best to stick with funds focused on public securities that charge low fees.”