How Does Switching Mutual Funds Affect Your Returns?

Not many investors are aware of the different types of mutual funds in the market. Due to the lack of knowledge and guidance, they end up investing in regular funds, which carry an average return. When they review the portfolio, they notice that they are not moving closer to their financial goals.

With every investment, you, as an investor, should move closer to your goals and plan your investments accordingly. The amount and tenure of investment should be based on the long-term financial goal only. Investing in mutual fund carries low risk and has high returns. A mutual fund is a diversified investment that has the benefit of compounding of interest. However, there is a possibility that you may think of switching or selling your mutual funds. Before making the move, you need to be aware of the procedure and the impact of this move on your returns.

Switching of mutual funds

When the entire investment or a part of the investment is moved from one mutual fund scheme to another within the same fund, it is known as switching of the mutual fund. This could either lead to the purchase of new units of a scheme or redemption of certain units of the scheme. Redemption will involve opting out of the fund and purchase will lead to switching to the scheme. Switching of mutual funds is usually carried out to improve the performance of the portfolio.

Procedure

You need to understand the procedure of switching the mutual funds. Research the top performing mutual funds and compare their returns before making the switch. For a one-time request, you need to fill up the transaction slip, which will include all the details about the scheme and units from which the investor is switching out and the scheme into which the investor is switching in. The Systematic Transfer Plan (STP) includes regular switching out of certain funds each month. A particular number of schemes are regularly switched from one month to another on an automated basis. You need to fill the STP registration form in order to activate the same. Further, there are triggered switches where the switch is automatically triggered due to certain events like a fall in the mutual fund performance. This facility is offered by the fund houses and it helps the investor reduce risk due to an uncertain event.

Returns

If you switch from one scheme to another, there will not be a huge impact on the mutual fund returns since the fund remains the same. You are not moving from equity to debt or equity to a fixed return plan, you are only switching internally within the same fund; hence, there will not be a huge impact on the return. Additionally, switching also does not have an impact on the compounding of interest. There will not be a reduction in the benefits.

Risk

The risk of the portfolio will remain the same since the asset class does not change. The benefit of investing in the mutual fund is the diversification it offers, and this remains the same throughout different funds. With a switch from one fund to another, there will be no change in the risk. Based on the mutual fund performance, the decision to switch should be taken since it will not have an impact on the risk and return of the portfolio.

Tax implications

In the event of switching, the exit load will be applicable to equity schemes. Moreover, if the switch is made within a period of three years, the fixed income schemes will be subject to short-term capital gains.

Why should you switch?

Firstly, you should invest with a long-term goal in mind. Every investment should be carried out keeping the goal and the tenure at the forefront. You should regularly monitor the performance of the portfolio and if you notice that the mutual fund returns are not as expected, you can make a switch. Gain information about the returns and risk before making the switch. Top performing mutual funds should be compared over a period and the entry and exit load should be kept in mind before making the move. Learn more about how to compare two mutual funds based on various parameters.

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles by others on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com