Switching Between Funds

Ravi and Priya realised they needed to alter their financial objectives or approach to investing after learning about Systematic Withdrawal Plans (SWPs) and how they could generate a consistent income stream from mutual fund investments. This could entail adjusting investments to lower risk or seize fresh opportunities.

This chapter will examine how moving between funds can help you make those changes and realign your portfolio to suit your evolving needs.

Switching funds means moving money from one mutual fund to another. Let’s say you’ve invested in a debt fund, but now you want to take on a little more risk and move into an equity fund. Instead of selling your entire investment and starting over, you can just switch funds. This enables you to effect the change without withdrawing your cash or paying these unnecessary taxes.

Switching between funds is usually done to rebalance a portfolio concerning an investor's goals or market conditions. You will invest part of your money into equity funds during the stock market boom. On the other hand, if the market is erratic or needs more stability, you could shift funds into some debt or hybrid fund, which is considered safer. All in all, what is required is making money work for you to fit your requirements.

When you switch between funds, you have more control over your investing strategy. You will be better positioned to control your investment strategy while switching funds. You will only make minor adjustments to your portfolio, moving your funds in and out of each based on performance or any changes in your financial situation rather than an overhaul. This flexibility is great because you can align your investments with evolving goals.

It’s also a great way to reduce risk. Let’s say you’ve invested in equity funds and accumulated many returns. But now, as you get closer to a significant financial goal like buying a home, you might want to shift some of that money to a safer fund to preserve your gains. You can manage your risk without giving away the potential for investment growth simply by switching between funds.

Yet another motivating factor to make the switch is better-performing funds. Not all mutual funds are created equally; some will outperform predictions. Transferring funds to an advanced fund is smart if a particular fund consistently underperforms similar ones. Doing this lets you maximise returns and avoid sinking your money into a fund that’s not working for you.

Of course, switching funds isn’t always without cost. If you have held the fund for less than a year, maybe some exit loads or taxes would apply. Timing is, therefore, of the essence when switching because this can reduce your returns due to these costs. But again, the switch could still be a good move in the long term if you've run the numbers and the potential return from the new fund is higher.

When switching, it’s essential to research the funds you’re moving into. Don’t just make the change based on past performance; look at the fund’s strategy, the type of investments it holds, and how it fits with your overall portfolio. A fund that looks good today might not always be the best fit for you down the road. Take the time to understand the fund’s goals and whether they align with yours.

Another thing to remember is that switching funds differs from redeeming your investment. When you redeem a fund, you’re selling your units and taking the money out of the mutual fund. But with a switch, you’re transferring money from one fund to another without taking it out of the system. This can help you avoid unnecessary withdrawal fees or taxes in some cases.

Conclusion:

Ravi and Priya know that investing is a continuous process and are constantly refining their strategies. Their financial route is dynamic; keeping the momentum towards their goals involves flexibility with choices, such as switching between funds.

The following chapter will elaborate on large investments—a strategy allowing you, Ravi, or Priya to invest larger sums at one time and speed up the growth rate. We will understand how, while diversifying and managing your portfolio, lump sum investments can enrich your overall approach.