What you should know about mutual fund switches

Mutual funds offer a facility called "switch", which allows an investor to shift money from one fund to another within the same fund family. Let us know more about this facility. Click on the link below to read my article about this facility:

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The English translation is as under:

One of the facilities that mutual funds offer is to shift from one scheme to another. This facility is called “switch”. This shift could be for the full balance or even a part of it. This facility is available to only open-ended mutual funds and not in case of close-ended funds. This is because, anyway, one cannot transact with the fund in case of close-ended mutual funds.

Are there any restrictions? How many switches are allowed per year? There are no restrictions in case of open-ended funds, except for applicable exit loads. One can do unlimited number of switches. The only restriction is the pay-in / pay-out cycles in case of fund schemes.

For example, if you redeem from equity funds, the redemption proceeds are paid on a T+2 basis., the applicable NAV in liquid fund would depend on availability of clear funds. Hence, in case of switch into a liquid fund from an equity fund, the switch would be effective only after the redemption from the equity is processed. This would reduce the total number of switches that can be done.

If any exit load is applicable, the same would be charged in case of switches, too.

One big restriction is that switches are allowed only across schemes within one fund house. That means, you are not allowed to switch money from a scheme managed by a fund house into a scheme managed by another fund house.

Why does an investor need this facility?

There are various reasons why an investor may need this facility.

First of all, many investors park their lump sum investment in a liquid fund and then transfer the same regularly into an equity fund over a period. This periodical system of switching is also called STP or Systematic Transfer Plan.

Secondly, some investors take a view on the markets and shift money from one scheme to another. So when equity markets appear costly to an investor, one may want to shift from equity fund to a debt or a liquid fund.

Many switch from equity fund to liquid fund when they want to book profits.

At the same time, some use the facility to switch from liquid fund to equity fund when the equity market appears to be cheap.

Those who believe in the benefits of asset allocation also rebalance the portfolio through the process of switches.

However, this facility is for the benefit of the investors and must be used only when required. It should not be misused.

Finally, please remember that a switch is redemption from one scheme and a simultaneous purchase into another. Hence, the scheme from which one is exiting, there could be applicable taxes.

Both the exit loads and taxes reduce the overall return on investment and hence one must be very careful about these two.

- Amit Trivedi