What is switching?
In the context of mutual fund investments, ‘switching out’ is the act of moving your investments from one mutual fund scheme to another within the same fund house — switching in — without having to see your money move in and out of your bank account.
How does it work?
You can switch or move your investments from one scheme to another when both schemes are managed by the same asset management company. Website mutualfundssahihai.com says that to switch funds, the investor needs to fill up and sign a switch form specifying the number of units to be switched from the source scheme and the name of the destination scheme. Online platforms allow you to do this switch with just a click, by choosing your source scheme and destination scheme.
Is it like a sale and purchase?
When you switch between schemes, the source scheme views your moving out as a redemption or sale of units in that scheme.
The destination scheme is where you purchase units, technically.
Will there be tax implications?
Even though you don’t sell and buy units in the normal sense, it is tantamount to selling units in your source scheme.
Capital gains tax will hence apply on your gains on ‘sale’ of units in the source scheme. The applicable rate will depend on how long you have held those units.
Are there exit load expenses?
Yes. Whatever exit load charges were applicable — had you sold and encashed units in the source scheme — would apply when you switch out.
Can you switch from a scheme in one fund house to a scheme in another?
No. It is not possible to move investments between two schemes belonging to two different fund houses, using the switch option.