What is Switching in Mutual Funds and How Does it Work?

When you invest in a mutual fund, there is a high chance that it might be underperforming, or you may come across a better scheme. In such cases, you can move your money between schemes. This is called switching. But switching between schemes is not easy. You will have to follow some steps and rules, and your decision to switch will have consequences. Read to learn more about switching in mutual funds, its benefits, and factors to consider before switching.

What is switch in mutual funds?

When you move your investment (in full or partially) from one scheme to another within the same fund house, then you are switching. It is also possible to move your money between two funds of different fund houses, which is called switch-in and switch-out. In this case, you will need to redeem your investment from one fund and invest in another, which might involve exit load and tax on capital gains.

You can also switch from regular to direct plans in the same fund. A regular plan has distributor commission, whereas a direct plan doesn’t have this reducing your overall expense of investing in the fund. However, you will have to manage your investment in the direct plan.

The primary advantage of switching is that you can exit from an underperforming fund and move to a better one to increase your portfolio returns. Moreover, you can reduce your investment cost by switching from a regular to a direct plan. Switching is also beneficial for planning your goals. You can preserve your wealth by switching from equity to debt when you are approaching your goals.

Multiple possibilities might lead to switching between mutual funds. The following are some of them:

• You want to manage your investment and switch from regular to direct.
• You are approaching your goal and wish to secure your wealth and switch from equity to debt.
• The fund you invested in is underperforming, and you want to invest in a better fund.
• You want to move from growth to dividend or vice versa.

Whatever the reason, you must follow the same process for switching your mutual fund investments.

Benefits of Switching in Mutual Funds

Switching in mutual funds can be a helpful way for investors to improve their investment strategy. It allows you to move your money between different funds or within the same fund family, which can help you adjust your investments to better meet your financial goals. Here are a few benefits of switching:

1. Better Performance

   If a fund is not performing well, you can shift your money to one that has a stronger track record. By keeping an eye on growth metrics like CAGR (Compound Annual Growth Rate) or XIRR (Extended Internal Rate of Return), you can identify funds that might offer better returns over time. This helps you make decisions that can lead to higher returns by the time your investment matures.

2. Convenience Through Digital Platforms

   Many mutual fund companies and investment platforms offer online tools to make switching easy. You can move your investments with just a few clicks, saving time and effort. This seamless process allows you to adjust your portfolio quickly without having to go through a lot of paperwork or extra steps.

How to Switch Mutual Funds?

Switching mutual funds can be done in two ways, depending on whether you are staying within the same fund house or moving to a different one. Here’s how you can do it:

1. Switching Within the Same Mutual Fund House

   If you want to move your investments between different schemes offered by the same fund house, you have a few options:

   • Submit a switch form to the asset management company (AMC) directly.
   • Visit the AMC’s website and complete the switch online.
   • Use independent mutual fund platforms that let you switch investments easily through their portals.

   For investments below ₹2 lakh, the switch is usually processed on the same day if you initiate it before 3 pm. However, if the amount is above ₹2 lakh, it might take a couple of days to transfer the units to the new scheme.

2. Switching Between Different Fund Houses

   If you’re moving your money from one fund house to another, the process is slightly different. You will first need to redeem your units from the current fund. Once the redemption is complete and you receive the money, you can invest it in the new mutual fund scheme.

   This process takes a bit longer since you need to wait for the funds to reflect in your account before purchasing the units in the new fund.

Factors to consider before switching in mutual funds

Switching your mutual fund investment has some consequences. The following are factors you must consider before switching.

• Exit load:

  Mutual funds have an exit load, which is a penalty for withdrawing your funds before a specific duration, which is one year for most mutual funds. If you switch your investments within one year, you will have to pay an exit load of around 1% to the fund house.

• Lock-in period:

  Equity Linked Saving Schemes (ELSS) come with a lock-in period of three years. This means you cannot withdraw your investments before three years. So, you cannot switch your investments before the completion of three years. However, you can stop investing in the fund.

• Tax:

  Switching involves selling your investment in one fund (or plan) and buying units of another fund (or plan). If you have made a profit on your investment, it will be taxable at the applicable rate.

• Portfolio management:

  Switching from a regular to a direct plan requires you to manage your portfolio. You will have to track and monitor your portfolio on your own. Switching to a direct plan also requires you to have market knowledge that will help manage your portfolio.

Tax Implications of Switching Between Mutal Funds

Frequently asked questions

Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.

Vivek Agarwal

Financial Content Reviewer

Vivek Agarwal is a dynamic leader with deep expertise in investment platforms and wealth management. At Jupiter Money, he spearheaded the Investments vertical, building in-house solutions for direct mutual funds, digital gold, and fixed deposits, scaling the platform to over 200,000 customers. He was an early adopter of SEBI’s Execution-Only Platform (Category 1) and managed key operational, compliance, and customer service functions.

Previously, Vivek co-founded Upwardly, a robo-advisory wealth management platform offering tailored investment and insurance solutions. As Chief Investment Officer, he pioneered dynamic asset allocation, goal-based investments, and motif-based portfolios. After Upwardly's merger with Scripbox, he led the integration of independent financial advisors into Scripbox, transitioning assets under management and customer relationships seamlessly.

His strategic leadership extended to setting up corporate treasury services for startups and MSMEs, and establishing verticals in insurance and bond sales, including Sovereign Gold Bonds. Vivek’s diverse experience and strategic vision continue to shape the financial services landscape in India.