A step-by-step guide to switching mutual funds

Investors must always be prepared to modify their investment approaches as per the ever-evolving market landscape. Switching mutual funds can be a practical approach to aligning your investments with changing financial goals and market dynamics. This process involves moving your investments from one mutual fund scheme to another within the same fund house.

Whether you aim to adjust your portfolio to a different asset class, explore market opportunities, or refine your investment approach, it is important to understand the steps involved in switching funds.

This guide outlines the process in a clear and structured way, helping you make informed choices and carry out the switch efficiently.

Table of contents

• What is the switching in mutual funds?
• How does switching work?
• How to switch from one mutual fund scheme to another?
• Online method – through the AMC’s website
• Offline method
• Benefits of switching in mutual funds
• When should you consider a mutual fund switch?
• Factors to consider before switching

What is the switching in mutual funds?

Switching mutual funds refers to the process of transferring your investments from one mutual fund scheme to another within the same Asset Management Company (AMC). It allows investors to reallocate their funds without having to redeem and reinvest them. This flexibility gives investors the opportunity to adapt their portfolios to changing market conditions, financial goals, or personal preferences.

How does switching work?

Switching mutual funds is like shifting your money from one bucket to another within the range of funds offered by a single asset management company.

Here’s an overview of how the process works:

Redemption: When you initiate a switch, your units in the existing fund are redeemed. Essentially, you’re selling your investment in that fund.

Reinvestment: The redemption proceeds are then reinvested automatically in the new fund scheme you’ve chosen within the same fund house.

Key points to remember:
Streamlined process: Switching is typically straightforward since it occurs within the same fund house.

Taxes: Although convenient, switching is treated as a redemption followed by a purchase for tax purposes. As a result, capital gains tax will apply based on your holding period, the fund category and the redeemed amount.

Exit loads: Some funds impose exit loads, which are fees charged if you redeem investments within a specified time frame. These charges can affect your returns, so it’s important to review any exit load details before switching.

How to switch from one mutual fund scheme to another?

Before initiating the switch, carefully review the exit load structure of your current fund. Exit loads are charges levied when exiting a mutual fund within a specified period. Additionally, be aware of any tax implications associated with redeeming your investments. Understanding these costs will enable you to make an informed decision.

Online method – through the AMC’s website

Before carrying out any online mutual fund transactions, make sure you are registered with your AMC.

• Step 1: Verify your mutual fund’s status by signing into your account.
• Step 2: Navigate to the "Transaction" page where you can perform various financial activities such as purchasing, exchanging, or redeeming money.
• Step 3: Select the "Switch" option, then choose the scheme, its plan, and the option you wish to exit from. Similarly, select the scheme, plan, and the option you would like to join. If you are transitioning from a regular plan to a direct plan, ensure that the new plan you select includes the term "Direct" in its name. (Your AMC will be notified about the modification request.)
• Step 4: If you submit your request before 3 pm, the amount will be transferred on the same day. The allocation of units will take T+1 day for liquid to debt/equity and debt to liquid/equity, T+2 days for equity to debt/liquid.
• Step 5: To check the status update of your switch request, log in to your account after 4 days.

Offline method

An investor is required to follow the same steps as above – in person – to switch plans offline.

• Step 1: Visit your AMC office.
• Step 2: Fill in the transaction-switch form with all the necessary information (name of your fund, folio number, target scheme you wish to convert to, etc.)
• Step 3: Submit the form.
• Step 4: After processing your request, the AMC will contact your registered email address with updates.

Benefits of switching in mutual funds

Switching mutual funds can offer various potential benefits for investors:

Responding to market trends: Switching enables you to reallocate investments to funds better positioned to take advantage of market shifts or sector rotations. For instance, you might switch from a large-cap fund to a mid-cap fund during periods where mid-sized companies are expected to perform well.

Maintaining asset allocation: Market movements can cause your portfolio's asset allocation (e.g., equity vs. debt) to deviate from your target mix. Switching allows you to rebalance by adjusting investments across asset classes or fund categories.

Managing risk: If your risk tolerance or investment timeline changes, switching can help you realign your portfolio. For example, you might opt for a lower risk fund as you near retirement.

Consolidating investments: Switching can simplify portfolio management by consolidating your investments within the same fund house, reducing the number of accounts and making it easier to track your holdings.

Exiting underperforming funds: If a fund consistently lags behind its benchmark or peers, switching to a fund with stronger performance within the same fund house can potentially improve your returns.

When should you consider a mutual fund switch?

You may want to consider switching mutual funds in the following scenarios:

Underperformance of the fund: If your current fund consistently lags behind its benchmark or peers over an extended period (typically 1–3 years), it may be worth evaluating a switch. However, assess performance objectively and avoid making decisions based on short-term fluctuations.

Change in investment goals: As your life circumstances evolve, your financial goals may change. For example: As you near retirement, switching to more lower risk funds may be important to mitigate the impact of volatility on the invested capital.

Shift in risk tolerance: Changes in personal circumstances or financial priorities can affect your risk tolerance. If the risk level of your current fund no longer aligns with your comfort level, switching to a more suitable fund might be necessary.

Adapting to market conditions: Switching funds can help you leverage market opportunities. For instance, moving from a large-cap fund to a mid-cap fund might be beneficial during periods of expected strong performance by mid-sized companies. However, it’s important to assess the cons as too much switching can increase costs and attempting to time the market can be risky.

Factors to consider before switching in mutual funds

• Performance: Analyze the performance of your current mutual fund scheme against its benchmark and peers. If it consistently under performs or fails to meet your expectations, it may be a signal to consider a switch.
• Investment objective: Evaluate whether the investment objective of your current fund aligns with your evolving financial goals. Switching may be warranted if your objectives have changed or the fund's strategy no longer matches your requirements.
• Risk and volatility: Assess your risk tolerance and consider the level of volatility associated with your current fund. If the risk profile no longer suits your comfort level or the fund's volatility is too high, exploring other options may be prudent.
• Fund manager consistency: Evaluate the track record and consistency of the fund manager managing your current scheme.

Conclusion:

Switching mutual funds provides investors with the flexibility to adapt their investment portfolios to changing market conditions and personal circumstances. By carefully assessing your investment goals, researching potential alternatives, and seeking expert advice, you can navigate the process seamlessly. Remember to consider factors such as investment objectives, risk, and fund manager experience before making the switch. This way, you can take control of their financial journey and ensure their investments grow in the long term.

FAQs:

Can I switch between different types of mutual funds?

Yes, it is possible to switch between different types of mutual funds such as equity and debt.

What are the different factors to be considered before switching in mutual funds?

You must consider the investment objectives, risk appetite, and investment horizon associated with each type of fund to ensure the switch aligns with your financial goals.

How long does it take for a mutual fund switch to be processed?

While the processing time for a mutual fund switch may vary among different fund houses, it usually takes T+1 to T+2 days for the switch to be processed, during which the NAV is calculated.

Is there a penalty for switching mutual funds?

No, there is typically no penalty for switching. However, you will be eligible to pay capital gains tax, as the switch is treated as a redemption for taxation purposes. The tax amount will depend upon the redemption amount, scheme category and holding period. Additionally, exit loads may apply in some scheme if switches are made before a specified initial holding period.

Is switching of mutual funds taxable?

Yes, switching between mutual funds is generally considered a taxable event. It is treated as if you are selling your existing units and reinvesting the proceeds in a new fund. This can have tax implications depending on the holding period and the applicable tax rates.

What is a switch fee for mutual funds?

A switch fee is a charge levied by some mutual fund houses for switching between funds within the same fund family. This fee may vary depending on the fund and the fund house.

How do I switch mutual funds?

You can typically switch between mutual funds through online platforms, mobile apps, or by contacting your fund house or distributor.

What are the costs involved in switching mutual funds?

Costs associated with switching mutual funds may include:

Exit load: Some funds may charge an exit load if you redeem your units within a specific timeframe.

Tax implications: Switching is treated as a redemption at the source scheme and capital gains tax may apply depending upon the redemption value, scheme type and holding period.

Can I switch mutual funds during a lock-in period?

Generally, you cannot switch out of a mutual fund during its lock-in period. Lock-in periods are typically applicable to funds like ELSS (Equity Linked Savings Schemes).

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.