Mutual Fund: Guidelines for Switching from One Plan to Another Under the Same Scheme 

Investment in mutual funds is one of the prudent ways of growing your wealth. However, when investing, a major hindrance is switching out and switching in mutual funds. Continue reading to understand how you can switch from one mutual fund to another.

Switching between mutual funds

Each mutual fund needs a distinct investment strategy. There are times when a particular fund may not perform well i.e., the fund’s value may be down, or you might not want to take any risk. In such cases, you can choose to switch options. For this, you must sell units of your existing mutual fund and then buy units of the new fund.

When should you think about switching to mutual funds?

Below are the scenarios:

  • When you want to switch from growth to dividend option.
  • When you are looking to select a fund with higher returns.
  • When you are going to make the switch from regular to direct plan.
  • When you want to shift from equity to debt mutual funds or vice versa.

How can you switch from one scheme to another scheme in a mutual fund?

A shift request can be made by simply filling up the switch form or directly writing a letter mentioning the switch details. You must specify the mutual fund scheme’s name, option, and plan where the units must be switched.

Switching within the same scheme of mutual fund

If you want to switch in the same fund house, you must fill up a switch form. Here, in this switching form, you must specify the units that you want to be switched from the existing scheme to the desired fund scheme. Minimum investment amount criteria should be met for the switching process. When switching you require to consider the implications of capital gain tax and exit load. There is usually no issue with the settlement period for the switch under the same mutual fund house.

Switching to a distinct mutual fund scheme

When you shift to a distinct mutual fund, you are redeeming your investment in your existing mutual fund scheme and reinvesting it in another mutual fund scheme. You might apply for liquidation of your existing fund and wait to receive the funds in your account. Ensure to consider the exit loads and tax implications before liquidating your investments. Fill up the mutual fund application form where you are looking to reinvest and then proceed once you have received the credits from your initial mutual fund.

Important parameters to factor in before making the mutual fund switch

Now, as you are aware of how to make the switch, you must also know important parameters to factor in before making the switch:

Tax

As capital gains tax control the mutual fund transactions, you either will attract long term or short-term capital gains tax. In case you are switching from an old fund to a new one or making a shift under the same scheme, it is known as liquidation. For example, if you have decided to shift from a regular to a direct option, you must pay the capital gains tax. Here, in this case, the shifting process is called liquidation and hence tax is levied. Listed below are a table showing the tax rates for short term and long-term funds:

Fund type Capital gains tax rate Holding period
Debt fund According to the tax slab rates Short term – below three years
Debt fund 20 percent with indexation Long term – three years and above
Equity fund 10 percent Long term – over 1 year
Equity fund 15 percent Short term – below 1 year

For the hybrid funds, if over 65 percent of the funds are in equity investment, then the tax rate will be according to the equity fund.

Exit load

It is the percentage of net asset value (NAV) of a specific mutual fund unit selected by you. This is a fee that the AMC charges if you sell your mutual fund unit or liquidate the fund units. So, when you look to sell a unit in a mutual fund, the AMC will subtract the exit load charge and will credit the remaining amount. Thus, if you are looking to switch your mutual fund, you must consider how much exit charge you are willing to pay if you redeem your fund before the lock-in period is over.

Lock-in period

In the case of mutual funds such as ELSS (Equity Linked Savings Scheme) where the lock-in period is 3 years, making a switch will not be possible. Moreover, you cannot liquidate your invested amount. However, you have the choice to stop the ongoing SIP.

In case you are looking to shift from one fund to the next, you can do this through the offline or online route. You can make the switch at any time of any frequency i.e., entirely, or partially. It is completely your decision to make this move, but you must also factor in additional exit charges and tax you would require paying in return.

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