Mutual funds have long been one of the most popular investment options. Seasoned investors and novice ones alike invest in them due to the automatic diversification they offer and the benefits of professional management, customisability, and liquidity.
That said, you might find yourself wishing to switch mutual funds. This could be for a variety of reasons, such as a change in fund manager, realigning your portfolio with investment goals, underperformance of the current mutual fund scheme, or even simplifying your portfolio.
If you’re wondering if it’s possible and how to go about it, keep reading this guide to switching to mutual funds.
Switch in mutual funds involves transferring your investment from your current mutual fund scheme to another within the same fund house or another. This can be prompted by the underperformance of the current mutual fund, a change in mutual fund manager, a desire to realign with investment goals, or even to simplify the portfolio for easier management.
A mutual fund switch can be highly beneficial, if done at the correct moment in your investing journey. Some cases in which a mutual fund switch may be the correct choice for you include:
- If your current mutual fund is not performing as well as other funds, you may switch to a different fund.
- If you discover another mutual fund that has showcased better performance, higher returns, or lower charges, you may switch to the better alternatives.
- If your current mutual fund goes through a fund manager change or a strategy change that you are not happy with, you may switch to a fund whose investment strategy is more in line with your goals.
- If your investment or financial goals or risk appetite changes, you may switch mutual funds to ensure your investment plans keep evolving with your investment needs.
You can switch mutual funds online or offline. Here are the steps for both:
The following costs are involved in switching mutual funds:
- Exit loads: You may be charged a fee when you redeem or switch your investments before a given holding period. This fee is known as an exit load and can vary based on the percentage of the total value of the investment.
- Capital gains tax: A redemption event, which means returning an investment to the investor before its maturity date, can come under capital gains tax and cost you extra. Investments held for less than a year are treated as short-term capital gains and taxed more. On the other hand, investments held for over a year are treated as long-term capital gain and taxed comparatively lower.
- Opportunity cost: Switching mutual funds can mean missing out on the profits that the current mutual fund could have potential earned for you. You must take such opportunity costs into account, especially with the possibility that the new mutual fund may not perform on par with the current one.
Switching mutual funds can have many benefits that can give your investment plans the extra boost they need. The benefits of switching mutual funds include:
- Asset rebalancing: Switching mutual funds allow you evaluate and balance your asset allocation according to how each asset class is performing. Asset classes may performance can fluctuate over time. If one asset performs better than the rest, your portfolio may becomes skewed towards that asset. Asset rebalancing allows you to restore this slewed balance and readjust your portfolio to ensure that it remains aligned with your long-term investment goals.
- Making the best of market conditions: The market is constantly changing. Smart investors make sure to keep up with the market changes and take advantage of fluctuating market conditions. A timely mutual fund switch can help you invest in asset classes that are performing well or are more reliable while avoiding high-risk options that are likely to cost you. In the same vein, you can switch away from safer options during market rallies to investments that will help you gain maximum returns.
- Adjusting investments with goals: Financial goals are not static. They may change and evolve with your needs and lifestyle. For example, you may start out with an aggressive investment strategy but start preferring a more balanced, low-risk investment strategy as you grow older. In such instances, you can switch to a mutual fund scheme that better suits your current needs and risk appetite.
- Switching to more rewarding plans: Direct plans can be a more cost-effective and high-returns investment options as compared to regular mutual funds schemes. Direct plans also cut down on costs as they do not charge any intermediary fees. Thus, switching from a regular mutual fund to a direct plan may be a wise option for some investors.
A switch in mutual funds is a smart investment decision if you find your current mutual fund underperforming, wish to realign your portfolio to investment goals or are just looking to simplify your portfolio for easier management. That said, be sure to consider the rules of switching in mutual funds before making a decision.
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Switching a mutual fund scheme reinvests your money directly into a new fund, while redemption transfers the amount to your account, giving you the flexibility to invest elsewhere later.
Switching between mutual funds does not incur any fees. However, a stamp duty of 0.001% is levied on the transfer of units in equity-oriented or hybrid schemes.
You can switch mutual funds by logging in to your personal mutual fund account and navigate to the transaction page. Click on the ‘switch’ option and select the fund name and the plan you want to shift to. Follow the instructions on your screen and complete the process.
A switch generally takes around T+6 business days to process, though the exact duration may differ based on the scheme type and the fund house.
You have the flexibility to switch units partially or entirely from one mutual fund scheme to another as per your investment strategy.
When you transfer investments from one mutual fund house to another, it involves a switch-out which is redeeming from the original scheme and reinvesting your investments into a new scheme involves a switch in.
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22 April 2025
7 mins read
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