If you are an employee of TCS working in Pune, now you would like to move to TCS Chennai which is near your hometown. You apply for the transfer request to HR.
By moving near your home location, you get to see your family often & your cost of living may come down, etc. You made the location transfer hoping for certain advantages.
Similarly, switching in Mutual funds is the same, but hoping for better returns and to mitigate risk with good asset allocation.
What is switching in Mutual fund?
You can switch from one mutual fund scheme to another mutual fund scheme in the same AMC without selling or redeeming your units.
You can switch your mutual fund units partially or fully without paying any penalty.
But when you need to switch the mutual fund scheme from AMC A to AMC B, you need to redeem your mutual fund units from your existing scheme and invest it in a new scheme.
This involves exit load fees and capital gain taxes.
Read more: Nifty 50 index fund returns from inception
When you should do switching in Mutual funds?
Investors who do switching in Mutual funds are doing this for various reasons. Some common reasons are listed below:
Case 1: If your existing mutual fund scheme performs poorly and delivers poor returns, in such situations you can look for switching from your existing mutual funds to a better-performing fund within the same AMC.
OR else, you can redeem the existing units and make it as a fresh investment in a different AMC mutual fund scheme.
Case 2: You want to reduce your risk profile by moving from equity fund to debt asset class.
Case 3: You would like to reduce your expense ratio fee by moving from a regular fund to a direct mutual fund.
Case 4: You want to switch to another AMC (asset management company)
Does switching Mutual funds taxable?
Switching in Mutual funds attracts taxes. I have listed the cases below:
Case 1: If you are switching within the AMC to an equity mutual fund scheme or a different one, it attracts capital gain taxes.
If your units are eligible for long-term investment (more than a year), you would be paying 10% on your gains if it exceeds 1 lakh.
If your units are eligible for short-term investment (less than a year), you would be paying a 15% tax.
Case 2: If you are selling the existing mutual fund and investing in a mutual fund in a different AMC, it still attracts capital gain taxes.
Above case 1 taxation rule applies here.
Case 3: If you are switching the mutual fund scheme within AMC and holding your investments for more than a year and you are in a loss. Switching in this situation would be tax-free.
Case 4: If you have invested in schemes like ELSS, you need to wait until the lock-in period (3 years) is completed before you consider switching.
Read more: What is nifty next 50 index fund?
Things to consider while switching in Mutual fund:
Exit Load: Many Mutual fund schemes have an exit load of 1% to prevent investors from exiting from the fund within a year. If your investment is more than a year then the exit load will be NIL.
Taxation: You need to be watchful of tax treatment for different asset classes.
Lock-in period: As said earlier, the ELSS fund has a 3-year lock-in period. This means you cannot withdraw your money within 3 years neither you can switch your fund.
Benefits of switching in Mutual fund:
- Switching in Mutual funds can improve your asset allocation as you near your investment goals or retirement.
- With mutual fund switching, one can reduce liability with an underperforming asset and shift to a higher-performing one. As investors, we use parameters like CAGR and XIRR to understand the net growth rate of the asset compared with the benchmark index.
- Digital infrastructure has made the switching in mutual funds effortless. Not only can they apply for a switch online, but they can also directly transfer their money from one scheme to another.
Switching your funds frequently can affect your overall return due to taxes, and exit load. It’s better to take ” Switch” with a pinch of salt in your investing Journey.
Thank You for reading!