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.
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:
Whatever the reason, you must follow the same process for switching your mutual fund investments.
To switch between schemes of the same fund house, you can either submit a switch form to the asset management company (AMC) or visit their website and switch your investments. Alternatively, you can also go to the independent mutual fund platforms’ website and easily switch your investment.
The switch will happen on the same day for an amount less than Rs 2 lakhs, provided you do it before 3 pm. If your investment is above Rs 2 lakhs, it takes a couple of days to receive the mutual fund units.
To switch between funds of different fund houses, you will have to redeem your investment in the existing fund and then purchase units of the new fund. Wait until you get your money from the existing fund, and then invest in the new fund.
Switching your mutual fund investment has some consequences. The following are factors you must consider before switching.
When you switch out and switch between mutual funds, your gains will be taxable. If you switch out of an equity fund, your gains will be taxable similar to equities. Short-term capital gains tax will be levied for gains if you switch within one year. In contrast, long-term capital gains tax will be levied for gains above Rs 1 lakh if you switch after one year from the investment date.
If you are switching from a debt fund, gains within three years are considered short-term capital gains and will be taxed per your income tax slab. The long-term capital gains tax is gains earned after three years from the date of investment and will be taxed at 20% with an indexation benefit.
In the case of hybrid funds, they are taxed as per their allocation to equity and debt. If the portfolio has more debt, they are taxed like debt funds. In contrast, if the portfolio has more equity, they are taxed like equity funds.
When you move your investments between mutual funds of different fund houses, it is called switch-out and switch-in. You will have to redeem your investment from one fund and invest the proceeds in another fund.
Investors switch between mutual funds for various reasons. If they find a better performing fund or want to move from regular to direct to earn high returns or preserve wealth by switching from equity to debt towards the end of the goals’ tenure.
No, there is no penalty for switching between funds. However, fund houses can levy an exit load if you switch before a specific time period. Moreover, the gains you have earned so far are subject to capital gains tax.
Yes, if you switch between funds before a certain time (one year for most of the funds), then you will be charged an exit load on your investment.
When you switch between funds, you will sell your units of one fund (or plan) and buy units of another fund (or plan). Your investment will be subject to exit load (if any), and you will also have to pay taxes on your capital gains (if any).
Yes, you can switch from one fund to another. The funds can be of both fund houses or two different fund houses. To switch within the fund house, you can use the switch option. And to switch between fund houses, you will have to sell your units of one fund and buy units of another fund.
When you switch from regular to direct, you will invest in the same fund but in a different plan. Your expenses will be low as the expense ratio of direct funds is less. Moreover, your returns in the long term will be high.
Switching often between mutual funds is not recommended. You must switch between funds only if your fund is underperforming consistently when compared to the market and its peers. You should switch to a high-performing fund only when you are not satisfied with your fund returns.
Switching from your existing investment to a new fund offer (NFO) should be a well-thought-out decision. You must assess the fund’s objective and check if it aligns with your goals. Then, you must see how it performs in different market conditions, and only then switch your investment to an NFO.