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.
How to Switch From One Mutual Fund to Another Online?
Switching from one mutual fund to another through online channels is a simple and convenient process. Here are the key steps presented that are applicable across popular channels:
- Step 1: Log in to your mutual fund platform through the website or mobile app
- Step 2: Go to your portfolio section
- Step 3: Select the mutual fund that you want to switch out of
- Step 4: Choose the fund to switch into from the same fund house
- Step 5: Enter the amount or units to switch
- Step 6: Review your NAV type and plan
- Step 7: Confirm and submit your request.
After following these steps, you’ll get an acknowledgement and transaction reference notification. This mutual fund transfer usually takes between 1 and 3 working days.
How to switch from one mutual fund to another offline?
You can also switch mutual funds offline by visiting the nearest branch of your fund house and filling out and submitting a form. In these forms, you will have to provide details such as your folio number, fund name, plan and options that you want to switch from and to.
Mutual Funds Switch Rules
Switching between mutual fund schemes includes specific rules related to taxation and fund house restrictions. These guidelines ensure that your in-kind transfer is processed smoothly.
- Same fund house: Switching can only be made between schemes on the same asset management company
- NAV Applicability: Switch requests submitted before 3 PM often get the same-day NAV transfer. After this period, your NAV transfer will be processed on the next working day.
- Exit Load: If your source scheme has an exit load, then it will be deducted.
- Plan Changes Taxes: Switching between regular and direct plans is allowed, but it is subject to your tax bracket.
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.
Conclusion
Switching mutual funds includes redeeming units from one scheme and investing in another in both online and offline ways. You may prefer to switch to get better returns, lower risk, or different fund types. But before switching, you have to consider capital gains tax, exit load and lock-in periods to avoid extra cost, and your switch follows fund house rules.