A Guide on How to Shift or Switch Mutual Funds

If you're a mutual fund investor looking to make changes to your investment portfolio, you can opt for switching mutual funds. Read on to learn the ins and outs of mutual fund switching and the factors you should consider while doing so.

What is a Mutual Fund Switch?

A mutual fund switch refers to transferring your investments from one mutual fund to another within the same fund house. This move is typically made to align your investment strategy with changing financial goals, market conditions, or risk tolerance.

Switching Mutual Funds - An Overview

There are two types of mutual fund switches - switching within the same scheme and switching to a different scheme.

• Switching with the same scheme

You'll need to complete a switch form to change your mutual fund house. In this switching form, you should indicate the units you wish to transfer from your current mutual fund scheme to the desired destination fund scheme. It's essential to ensure that both the switch-in and switch-out transactions meet the minimum investment amount criteria.

Additionally, when making this switch, it's crucial to consider the potential implications of exit loads and capital gains tax. These factors can have a say on the overall outcome of your switch, so it's important to factor them into your decision-making process.

Fortunately, if you are switching within the same fund house, you should encounter no issues with the settling term. This means that transferring your investments within the same fund house should proceed smoothly and without delays.

• Switching to a different scheme

When you switch to a new mutual fund scheme, you are divesting your investments from one mutual fund and reallocating them to another. To initiate this transition, you can start by submitting a redemption request for your initial investment amount and patiently await the funds to be transferred to your bank account.

However, it's essential to consider potential tax implications and exit loads before proceeding with the redemption of your assets. Once you have received the initial mutual fund's proceeds, you can complete the application for the new mutual fund scheme where you intend to reinvest your funds.

You can make the desired switch online or offline. For online switching:

• Step 1: Sign in to your account and verify your mutual fund's status.
• Step 2: Visit the "Transaction" page, where you can buy, exchange, or redeem funds. Opt for the "Switch" option and select the new plan you want to join.
• Step 3: Your fund house will receive a notice and the modification request.
• Step 4: Check the status of the switch after a couple of days.

For offline switching:

• Step 1: Go to your mutual fund office.
• Step 2: Ask for a transaction-switch form and fill it out with all the required details, including your fund name, folio number, and the target scheme you want to switch to.
• Step 3: Hand in the completed form.
• Step 4: Once your request gets processed, the fund house will send you an email to your registered address with the updated account information.

Mutual Fund Switch Rules

Switching within the same fund scheme involves:

• Adhering to several fundamental rules, such as meeting the minimum investment requirements.
• Assuming responsibility for exit loads.
• Addressing tax obligations related to capital gains.

To execute inter-fund switching, you must initiate the process by selling your current fund scheme and submitting a redemption request. Under the IT Act, capital gains are subject to taxation, which applies to mutual fund gains. These capital gains are categorized into short-term and long-term, each with its respective tax rate. Short-term capital gains from equity funds are taxed at a rate of 15%, while long-term gains incur a 10% tax.

It's important to note that specific mutual fund schemes, like the Equity Linked Savings Scheme, come with three-year lock-in periods. This implies that investors are prohibited from switching out of these schemes before the completion of the lock-in period.

When to Opt for Mutual Fund Switch?

Deciding when to switch mutual funds is a crucial financial decision and should be based on careful consideration of various factors. Here are some common scenarios when it might be appropriate to consider switching mutual funds:

• Change in Financial Goals: If your financial goals change, such as transitioning from long-term wealth accumulation to income generation during retirement, you may need to switch to different fund types that align better with your new objectives.

• Performance Issues: If your mutual fund consistently underperforms its benchmark index or peers over an extended period (typically 1-3 years), it may be time to consider a switch. However, it's essential to evaluate performance objectively and not make hasty decisions based on short-term fluctuations.

• Change in Risk Tolerance: Your risk tolerance may evolve over time due to changes in personal circumstances or financial goals. If you find that your current fund's risk level no longer matches your comfort level, switching to a more suitable fund may be warranted.

• Managerial Changes: Significant changes in the fund management team or strategy can impact a mutual fund's performance and future prospects. If you lose confidence in the fund's management, it could be a reason to consider switching.

• High Costs: If your fund charges high fees, including expense ratios and sales loads, and there are similar funds available with lower costs that offer similar or better performance, it might be cost-effective to switch.

• Diversification Needs: As your portfolio grows, you may need to diversify further to manage risk effectively. Switching to funds that provide exposure to different asset classes or sectors can help achieve better diversification.

Wrapping it Up

Mutual fund switching is valuable for investors who want to fine-tune their portfolios and adapt to changing financial circumstances. However, it's crucial to know the rules, costs, and potential tax implications of switching mutual funds. By following the guidelines mentioned in this guide and seeking professional advice when required, you can make intelligent decisions and work towards achieving your financial objectives. Happy investing!