A Guide on How to Shift or Switch Mutual Funds

Mutual funds investment is one of the best ways to grow your wealth. It is worth investing in mutual funds rather than keeping your money idle. However, while investing one of the obstacles is the switch in and switch out in mutual funds. Read further to know how you can make a jump from one fund to another.

Every mutual fund requires a different investment strategy. There may be times when a fund isn't performing well, and the fund value goes down, or you wouldn't want to take the risk. In such conditions, you can opt for switching option. For this, you have to sell units of the current mutual fund and then purchase units under the new fund.

When You Can Think of Switching in Mutual Funds

There can be following scenarios of switching mutual funds:

• If you want to move from debt to equity funds or vice versa
• If you're going to make a switch from regular to direct fund
• If you're looking to choose a fund with better returns
• If you want to move from growth to dividend fund

A request for switch can be made by filling a switch form or writing a letter specifying the switch details. Investor should specify the name of the mutual fund scheme, plan and option where the units are to be switched.

If you wish to switch within the same mutual fund house, you need to fill a switch form. In that switch form, specify the units to be shifted from existing mutual fund scheme to the destination fund scheme. The minimum investment amount criteria must be fulfilled for switch-in and switch-out. While switching you need to take into consideration of the implications of exit-load and capital gains tax. There is no issue of the settlement period for a switch within the same fund house.

But when you switch to a different mutual fund scheme, you are actually selling your investment in one mutual fund and investing it in another fund. You may apply for redemption from the first fund and wait till proceeds are received in your bank account. Consider tax implications and exit lods before redeeming investments. Fill up the application form of the Mutual Fund Scheme where you want to reinvest the proceeds after receiving the credits from the first mutual fund.

Now that you know about the scenarios when you can make a switch. Below is the implication:

Tax

Since capital gains tax govern mutual fund transactions, you will either attract short-term or long-term capital gains tax. If you're switching from old fund to the new one or switching within the schemes, it considered as redemption. For instance, if you have decided to move from regular to direct plan, you will have to pay capital gains tax. In this case, the switching process is considered as redemption, and hence the tax is levied. Below is the table that shows the tax rates for long and short-term funds:

For hybrid funds, if more than 65% of funds are under equity mutual fund investment, then the tax rate would be as per equity fund.

Exit load

This is a percentage of NAV (Net Asset Value) of a particular mutual fund unit chosen by the investor. It is a fee that asset management company charges if you sell a mutual fund unit or redeem fund units. So, when you want to sell a mutual fund unit, the AMC will deduct the exit load fee and will credit you the rest of the amount. If you're planning to switch mutual funds, you should consider how much exit penalty you would have to pay in case you sell the fund during the lock-in period.

Lock-in period

In cases where mutual funds like the Equity Linked Savings Scheme (ELSS) have a lock-in period of 3 years, you will not be able to make a switch. Additionally, you cannot redeem the invested amount; however, you can choose to stop an ongoing SIP .

If you're planning to move from one fund to another, you can do it either online or offline. You can switch in mutual fund as many times as you want, partially or entirely. It is your decision why you want to make a move, but you should also give a thought about the tax and exit fees you would have to pay in return.