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 instead of keeping your money idle. However, while investing, a major obstacle is switching in and switching out of mutual funds. Read further to know how you can make a jump from one fund to another.
What Is Switching Of Mutual Funds?
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 just don't want to take the risk. In such conditions, you can opt for the 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 the following scenarios:
- 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 funds
- If you're looking to choose a fund with better returns
- If you want to move from growth to dividend fund
How To Switch From One Mutual Fund Scheme To Another Mutual Fund Scheme
A request for a switch can be made by filling a switch form or writing a letter specifying the switch details. Investors should specify the name of the mutual fund scheme, plan and option where the units are to be switched.
Switching Within The Same Mutual Fund Scheme
If you wish to switch within the same mutual fund house, you need to fill a switch form. In that switching form, specify the units to be shifted from the 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 the implications of exit-load and capital gains tax. There is no problem with the settlement period for a switch within the same fund house.
Switching To A Different Mutual Fund Scheme
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 the proceeds are received in your bank account. Consider tax implications and exit loads before redeeming investments. Fill the application form of the Mutual Fund Scheme where you want to reinvest the proceeds after receiving the credits from the first mutual fund.
Factors To Consider Before Switching In Mutual Funds
Now that you know how to make a switch, you should also know what you must consider before making a switch-
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 an old fund to the new one or switching within schemes, it is considered as redemption. For instance, if you have decided to move from the regular to the 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:
| Fund type | Holding period | Capital Gains Tax Rate |
|---|---|---|
| Equity fund | Short term - Less than 1 year | 15% |
| Equity fund | Long term - More than 1 Year | 10% |
| Debt fund | Long term – 3 years and above | 20% with indexation |
| Debt fund | Short term – Less than 3 years | As per Income tax Slab rates |
For hybrid funds, if more than 65% of funds are under equity mutual fund investment, then the tax rate would be as per the 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 an 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 if 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 SI.
If you're planning to move from one fund to another, you can do it either online or offline. You can switch mutual funds as many times as you want, partially or entirely. It is your decision why you want to make a move, but you should also consider the additional tax and exit fees you would have to pay in return.