Investment journeys rarely stay on the same track. Investors are always looking to reposition their holdings as per the changes in the market or their investment strategy. A mutual fund switch provides convenience by allowing movement of investments between schemes. In this guide, you will learn what a mutual fund switch means, how the switching process works, and the costs and risks involved.
What Is Switch in Mutual Fund?
A switch in mutual funds means transferring an investment from one mutual fund scheme to another. In practical terms, switching involves two transactions taking place together:
- Redemption of units of the existing scheme
- Using the redeemed amount to purchase units in another scheme
As the process takes place in a single request, it becomes more convenient for investors as they don’t have to first sell the units and then use the proceeds to reinvest again.
Investors commonly use switching as a way to adjust their portfolio when market conditions change or when they want to move from one investment style to another.
Types of Switch (Intra-House vs Inter-House)
Mutual fund switches can broadly be categorised based on whether the transfer happens within the same fund house or between different fund houses.
Intra-House Switch
An intra-house switch takes place when investments are moved between schemes offered by the same AMC.
As both schemes belong to the same fund house, the switching process is straightforward. Investors can place a switch request through the AMC website or an investment platform.
Such switches allow investors to adjust portfolio exposure without leaving the AMC. For instance, an investor holding units in an equity fund offered by a particular AMC may switch to a hybrid scheme offered by the same AMC.
Inter-House Switch
An inter-house switch involves moving investments from one AMC to another.
Technically, it is not a direct switch. Instead, it involves two separate transactions. Firstly, the investment in the scheme of one AMC is redeemed. After receiving the redemption amount, a fresh investment is made in a fund scheme offered by another AMC.
Inter-house switching may be considered when investors prefer the performance record, investment philosophy, or strategy of another fund house.
Switching from Regular to Direct Plans
Mutual fund schemes typically offer two types of plans:
- Regular Plans: They are distributed through intermediaries such as advisors or distributors. They have a component of commission that is paid to the intermediary for his services.
- Direct Plans: In a direct plan, units are bought directly from the AMC. As distributors are not involved, these plans have a lower expense ratio, which can improve long-term returns.
Investors usually switch from a regular to a direct plan when they have gained knowledge, experience, and want to manage their investments independently.
This switch is treated as a redemption followed by reinvestment, which means taxes and exit loads are applicable.
When and Why to Switch Mutual Fund Schemes
Switching mutual fund schemes may be useful in several situations:
- Portfolio Rebalancing
Over time, movements in the market can change the allocation of assets. If equity markets perform well, the equity portion may become larger than intended. A switch to a debt or a hybrid fund can be made to restore balance. - Fund Performance
If a fund has been underperforming relative to its benchmark or peer group, a switch to another scheme with a consistent track record or better management can be made. - Investment Strategy
Investors may look for a switch when their investment approach changes based on market trends and personal preferences. - Plan Type
For those seeking control of their investments and lower expense fees, switching from a regular to a direct plan is a viable option that grants more authority and removes the middleman.
Process of Switching Mutual Funds
Switching mutual funds is a simple process that can be carried out in a step-wise sequence:
Step 1: Review the existing scheme
Check the current scheme to understand whether it aligns with your objective, or switching is required.
Step 2: Select the target scheme
Choose the scheme to which you want to transfer your investment.
Step 3: Submit a switch request
Now, place a switch request. The request should be placed through a platform you’re comfortable with.
Step 4: Redemption of units
Units of the current scheme are redeemed based on the applicable Net Asset Value (NAV).
Step 5: Allotment in the new scheme
The received amount is invested in the selected scheme, and new units are allotted as per its NAV.
Let’s understand how this process looks with a hypothetical example:
An investor holds 1,000 units of Fund A.
NAV of Fund A = ₹50
Total investment value = ₹50,000
If he decides to switch to Fund B, where the NAV is ₹25, the switching request redeems the units of Fund A.
The redeemed amount of ₹50,000 is then invested in Fund B.
₹50,000 / ₹25 = 2,000 units of Fund B
This means the investor now holds 2,000 units in Fund B after the switch.
Costs, Exit Load & Tax Implications of Switching
Although switching provides flexibility, investors should be aware of the costs involved.
Opportunity Cost
When switching, an investor must weigh the opportunity cost of leaving the current position.
A switch means you might miss out on potential gains if the current fund outperforms the new one. Also, during switching, the “time out of market” can cost you growth. Ensure the new fund’s fee savings and projected returns outweigh the immediate risks.
Exit Load
Many mutual fund schemes charge an exit load if units are redeemed within a specific timeframe. If the investor switches during this period, the exit charge is deducted from their investment value before it moves to the new fund.
For example, an equity fund may impose a 1% exit load if redeemed within one year.
Capital Gains Tax
Because switching is treated as a sale, Capital gains tax is applicable depending on the holding period.
- Equity Funds:
- Short-Term (Held < 1 year): Taxed at 20%.
- Long-Term (Held > 1 year): Taxed at 12.5% on gains exceeding ₹1.25 lakh
- Debt Funds: The gains are added to income and taxed at the applicable slab rate, regardless of the holding period.
Online Platforms & Tools for Switching
Switching mutual funds has become much easier with the availability of digital platforms.
- AMC Portals: Most AMC have their own websites where investors can view their portfolio and place switch requests. They are ideal for intra-house switches.
- Registrar Platforms: Registrars such as CAMS and KFintech allow management and switching of mutual funds across multiple AMCs through a single dashboard.
- Direct Investment Apps: Popular investment apps like Zerodha Coin and Groww enable switching through a simple one-click mechanism that is easy to operate.
- Comparison & Analytics Tools: Research firms like Value Research and Morningstar have tools that help in comparing fund performance, costs, and other relevant parameters.
Risks & Best Practices in Switching
Although switching helps in managing investments, it should be carried out thoughtfully.
- Avoid Frequent Switching: Switching too often can lead to additional taxes and exit load charges. It also disrupts the long-term compounding.
- Evaluate New Strategy: Before moving your capital, make sure the new fund’s philosophy aligns with your goals. Switching is irrelevant if the fund’s profile does not fit into your portfolio.
- Consider Timing: If a switch is made only by looking at a short-term trend, it may not yield expected results. Also, account for the time it takes to complete the switch.
- Review Costs: Before placing the request, understand the exit loads, expense ratios, and tax implications. Switching only makes sense when it is financially beneficial.
- Maintain Portfolio Discipline: A switch keeps the original allocation in place or adapts to changes in the investment goals. It should support a balanced investment strategy.
Conclusion
A mutual fund switch allows the transfer of funds between different schemes without leaving the mutual fund ecosystem. This flexibility allows adjustment of positions as per the changes in the market or the investment approach.
Factors like exit loads, tax implications, and suitability of the new scheme should be considered before making a decision. Switching can be an effective tool for a well-balanced portfolio when used wisely.
FAQs
A switch refers to transferring investments from one scheme to another. The process redeems units from one fund and reinvests the amount into another.
Yes, switching mutual funds can trigger exit loads and capital gains taxes. Frequent switching may also disrupt long-term strategies and reduce overall portfolio efficiency.
An intra-fund house switch occurs between schemes of the same AMC, while an inter-fund house switch involves redeeming units and investing in another AMC’s scheme.
Investors may consider switching when rebalancing portfolios, reviewing fund performance, adjusting asset allocation, or aligning investments with changing market conditions or investment strategies.
Yes, investors can switch from regular plans to direct plans of the same scheme. However, the applicable taxes or exit loads should be considered before switching.
Mutual fund switches can be done through AMC websites, registrar portals, and investment apps that allow submission of switch requests.
Switching mutual funds is treated as a redemption for tax purposes. Capital gains tax and exit loads may apply depending on scheme type, holding period, and fund rules.
