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Guide To Switch Mutual Funds 2022 – When and How to Switch Mutual Funds

Moving money from one investment scheme to another is referred to as switching funds. An investor has the option to switch between two distinct schemes, in which case money is removed from fund A (through a sell order) and invested in fund B. (a purchase order). In this article we list down the details of switching Mutual Funds.

There may be various situations when an investor may want to shift money from one mutual fund scheme to another. This article will act as a guide to switching mutual funds – When and how to switch mutual funds.

What is the switch out in mutual fund?

Switching mutual funds refers to the process of transferring money from one mutual fund scheme to another. The switching may be between two mutual fund schemes of the same asset management company (AMC) or between two mutual fund schemes belonging to separate AMCs.

Situations in which an individual may think of switching mutual funds

Now that we understand the switch out meaning in mutual funds, let us look at some of the situations in which an individual may want to switch mutual fund schemes. These include:

  1. An individual has invested a lumpsum amount in a debt mutual fund scheme and wants to transfer a small amount to an equity mutual fund scheme every month through a systematic investment plan.
  2. An existing mutual fund scheme is not performing on expected lines, so an investor may want to switch out and reinvest the money in a different mutual fund scheme.
  3. An investor has been investing in regular mutual funds and wants to switch to direct mutual funds.
  4. An individual has been investing in an equity scheme and is nearing the financial goal and wants to shift the money from the equity scheme to a debt scheme.
  5. An individual wants to do portfolio rebalancing based on the market situation. The rebalancing may involve transferring money from an equity scheme to a debt scheme or vice versa.

How to switch from one mutual fund scheme to another?

Individuals can switch from one mutual fund scheme to another using various channels. Some of these include:

  1. AMC website or office
    • An individual can switch from one mutual fund scheme to another through the AMC website. If both the schemes belong to the same AMC, then an application can be made for the transfer. In the application, the individual can mention the details of the scheme from which the switch out should be made and the scheme for the switch in.
    • If the schemes belong to different AMCs, then the individual will have to redeem the units from the switch-out AMC first. Once the redemption proceeds are credited to the bank account, the individual can invest in the mutual fund scheme of the other AMC.
    • Apart from the online switch, an individual can also switch between mutual fund schemes by visiting the AMC branch office.
  2. RTA website or office
    • Like the AMC, an individual can switch between schemes through the RTA. An individual can do the switch either through the RTA website or the office.
  3. Third-party websites
    • If an individual has invested in mutual fund schemes of multiple AMCs and wants to switch, then they will have to visit the websites or offices of multiple AMCs. It will take a lot of time and effort. In such a case, the individual can make the switch through third-party websites such as Glide Invest. The Glide Invest application makes it convenient for an individual to switch from multiple schemes of different AMCs to multiple schemes of different AMCs, all within a single application.

Factors to consider before switching mutual funds

An individual has to consider certain mutual fund switch rules before switching mutual fund schemes:

  1. Lock-in period
    • Some mutual funds, such as equity-linked savings schemes (ELSS), have a lock-in period. In ELSS, the lock-in period is three years. So, an investor cannot make a switch till the lock-in period gets over.
  2. Mutual fund switch charges
    • Some mutual fund schemes levy an exit load if the scheme units are redeemed before a specified period. The investor should consider the exit load at the time of redemption.
  3. Capital gains
    • When an individual switches out from a mutual fund scheme, it is considered a redemption; hence, capital gains tax will be applicable. For example, if an individual redeems equity mutual fund units within 12 months of purchase, the short-term capital gain (STCG) tax of 15% will be applicable on the STCG. 
    • If an individual redeems equity mutual fund units after 12 months of purchase, the long-term capital gain (LTCG) tax will be applicable. The first Rs. 1 lakh LTCG in a financial year will be exempt. The incremental LTCG will be taxed at 10% without indexation benefits.

Pausing existing investments instead of switching and starting new investments

As discussed earlier in the article, there may be various situations in which an individual may want to switch between mutual fund schemes. But, factors such as lock-in period, exit load, capital gains, etc., may deter you from switching. In such cases, you may pause fresh investments in the existing scheme till the lock-in period gets over or the waiting period for exit load gets over. In the meantime, you can start fresh investments in the other scheme.
To start investing in mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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