Switch: Moving profits from one scheme to another

A quick way to  sell and buy mutual fund schemes the switch mechanism. Essentially, it’s like redeeming the units of a mutual fund and subsequently buying another scheme.

A switch is an instruction given to a fund house to shift some or all units of your investments in one scheme to another. It can only be done between schemes of the same fund house. In fact, a systematic transfer plan is nothing but a series of switches from one scheme to another over a period of time.

How can I use the switch facility in a mutual fund?

The instruction can be given using a form or online. An investor needs to clearly mention the folio number, names of the schemes and the number of units or a particular amount of money.

Can I initiate an automatic switch upon making profits?

Yes you can. Here, the trigger facility comes in handy. The trigger facility offered by some fund houses enables switching or redeeming of units based on a rule specified by you. This could be an index touching a certain level or your portfolio clocking specific gains. If these conditions are met, then the units of the schemes  are switched to other schemes chosen by the investor.

Of course, a switch facility also allows investors to redeem units.

Investors must consider the option with a financial plan in place.

Are there costs associated with switching?

Each switch is treated as a ‘redeem and invest’ transaction. The sell transaction will have capital gains implications. The proceeds will be treated as capital gains and, depending on the asset class and the time for which the units are held, the investor is expected to pay the tax on capital gains.

While switching, you should also be careful about the exit loads too. If you sell units when the exit load is still applicable, the amount transferred will be ascertained after deducting the exit load.