Understand implications while switching from one mutual fund scheme to another

Mutual fund investing is one of the most effective strategies to build money. It is better to invest in mutual funds than to leave your money idle. However, one of the hurdles to investing is the transition in and out of mutual funds. That said, each mutual fund has a unique investment strategy where they may be instances when a fund underperforms, and the fund’s value decreases, or you may choose not to take the risk.

In such circumstances, you may wish to consider switching. To accomplish this, you must first sell units in your current mutual fund and then purchase units in the new one. To achieve this, you must first sell units in your existing mutual fund and then buy units in the new one. Under such circumstances, you may wish to consider switching.

That said, there are several instances where you consider switching, and this includes switching from debt-to-equity funds or vice versa, making the switch from regular to direct funds, or if you’re considering switching from growth to dividend funds.

A switch request can be made by submitting a switch form or writing a letter requesting the switch. The investor must identify the mutual fund scheme, plan, and option to which the units are transferred.

Switch within the same mutual fund scheme

If you intend to switch within the same mutual fund house, you must complete a switch form. Specify the units to be transferred from the current mutual fund scheme to the selected fund scheme. While switching, you must consider the exit-load and capital gains tax effects. The settlement period for a move within the same fund house is irrelevant.

Switch to a different mutual fund scheme

When you change mutual fund schemes, you sell one fund and invest in another fund category. You may redeem from the first fund and wait for the proceeds to reach your bank account. Before redeeming assets, consider the tax implications and exit strategies. Complete the application form for the mutual fund scheme in which you wish to reinvest the proceeds from the first mutual fund.

Taxability

Since capital gains tax applies to mutual fund transactions, you will be subject to either short- or long-term capital gains tax. If you switch from one fund to another or within a plan, this is considered redemption.

For example, you will owe capital gains tax if you switch from a regular to a direct plan. In this situation, the process of switching is deemed to be redemption, and hence the tax is levied.

Impact on exit load and lock-in period

The exit load is expressed as a percentage of the NAV (Net Asset Value) of the mutual fund unit selected by the investor. Simply put, it is a fee charged by an asset management organisation when you sell or redeem mutual fund units.

Thus, when you sell a mutual fund unit, the AMC deducts the exit load cost and credits you the remainder. If you’re considering switching mutual funds, it’s essential to examine the exit penalty that would apply if you sold the fund during the lock-in period.

Further, if mutual funds, such as the Equity Linked Savings Scheme (ELSS), have a three-year lock-in period, you will be unable to switch. Additionally, you cannot withdraw your investment; however, you can pause an ongoing SIP.

If you wish to transfer funds, you can do so either online or offline. You may change mutual fund investments as frequently as you like, either partially or totally. While it is entirely up to you whether you wish to move, however, should consider the associated tax and exit fees.