The need to switch mutual funds may arise if an investor believes that moving their money from one investing scheme to another would give them better returns. Though this strategy could work, there are certain important factors that you need to consider before switching mutual fund schemes.
In this piece, we have simplified the otherwise complexities of switching mutual fund schemes. Let’s dive in.
When you switch from debt to equity funds or from regular to direct mutual fund plans in a bid to mitigate risk or generate better returns is basically termed as mutual funds switch. In simpler words, you switch mutual funds when you move from one mutual fund scheme to another.
Normally, investors switch mutual funds if they feel their existing mutual fund scheme isn’t performing as per their expectations.
You can also switch fund houses, but in this case, you would need to redeem your units from the existing fund house and buy units from the new fund house you plan to switch to. This involves exit loads and capital gain payments (more on this later).
If you’re switching within the fund house, you can either switch between asset classes – example: equity to debt schemes, or from regular to direct plans.
There could be multiple factors that may lead you to switch mutual funds. It could be because:
However, before going for a mutual fund switch, you need to understand how to go about it and the other factors that need to be taken into account.
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Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
Investors can switch mutual funds either offline or online.
The steps involved in switching mutual funds online include:
Step 1: Log in to the Demat account that holds the mutual fund units in question.
Step 2: On the transaction page, one can purchase, switch or redeem funds. The next step involves choosing the switch option and the new plan.
Step 3: The fund house will receive a request for the plan change.
Step 4: If the switch request is done before 3 PM and the amount is less than Rs. 2 lakhs, investors will receive the same-day refund. Higher amounts demand more time for unit allocation. It can take at least 3 days for your funds to be transferred. Step 5: The investor should check the status of the mutual fund switch after 4 days. Online portals also allow investors to directly upload their existing portfolio and perform the switch.
The steps involved in offline mutual fund switching involve:
Step 1: Visit the office of your portfolio manager or the institution dealing with mutual funds.
Step 2: Obtain a transaction switch form. Submit the form after including details of the fund name, portfolio number and the target scheme.Step 3: Wait for a confirmation mail on your registered email address from the fund house.
Before switching mutual funds in a portfolio, investors need to understand the relative income-generating capacity of the switched fund and the mutual fund switch rules. Evaluation and revaluation of the portfolio are crucial. Here are some rules you should keep in mind before going ahead with the switch:
One should consider several factors before deciding to switch mutual funds. These include:
|= >3 years
|In accordance with the tax slab rate.
Additionally, hybrid funds are also subject to taxation as per equity funds if at least 65% of the investments are equity-oriented.
Switching mutual funds is a two-way process involving the sell and purchase orders. While the former is subject to taxation, the latter is proportional to its net asset value. Investors may use Compounded Annual Growth Rate (CAGR) and Extended Internal rate of return (XIRR) to predict the growth potential of a fund.
Mutual fund switch rules mention paying short-term capital gains tax and long-term capital gains tax after 1 year. However, switching from Debt funds involves paying short-term capital gains tax (less than 3 years).
All gains are generally added to the taxable income and taxed after that. Long-term capital gains (more than 3 years) attract 20% taxes.
Experts believe that mutual fund switching can improve asset allocation. Inter or Intra fund switching is considered redemption because it involves omitting the liability associated with a particular fund. Some major benefits of mutual fund switching are as below:
Tax effects on mutual funds switching are the same as in the case of withdrawal/redemption of mutual fund units. Fund houses can deduct taxes for short and long-term capital gains generated from the redemption of mutual fund units. Nevertheless, if your overall income is less than the exemption limit, TDS deductions can be avoided by submission of form 15G or 15H.
Point to note: go through the relevant tax laws before switching mutual funds. For instance, switching equity funds before one year of the investment would imply 15% taxation on capital gains. However, if you switch after one year of investment, the move is tax-free.
Investors may choose to switch mutual funds when evaluating their asset allocations in terms of their money-making capacity. They can do it manually through physical presence or by using tools like a Systematic Transfer Plan (STP).
Ans. Investors should have a clear idea of their investment decisions and the time period in which they wish to fulfil them. Mutual fund exit may be triggered by achievement or change in financial goals, extreme market volatility due to political factors, etc. But fund underperformance is a primary cause of mutual fund switching.
Ans. Any asset management company requires potential investors to understand the terms of the scheme. Also, they need some documents containing investors’ personal information. This includes an Aadhaar card, PAN card, a savings bank account, etc.
Ans. Investors holding debt funds or liquid assets for less than 3 years are liable to pay taxes on short-term capital gains as per their tax slab rates. For assets held for more than 3 years, taxation on long-term capital gains prevails, and investors are taxed at 20% after indexation.
Ans. Fund companies do not charge penalties for switching mutual funds. However, they levy an exit load when you invest in an equity fund and redeem it within a year. However, debt funds do not charge such fees for switching.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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