Undersrstanding switching costs in mf plans: It is very important for mutual fund investors to focus on switching cost, as it can have a major impact on their investment returns. Often investors ignore this important aspect, which may increase their unnecessary expenses. Switching means transferring investment from one fund to another, including expenses such as exit load and capital gains tax. Mutual funds have their advantages and disadvantages of switch. In such a situation, it is very important to understand switching cost to make better financial decisions.
What is a switch in mutual funds?
Switching in mutual funds means transferring your investment amount from one scheme to another. This transfer can be partially or fully done and usually occurs inside the same fund house. However, if you want to withdraw your investment amount from a fund house and insert it to another fund house, it is called switch-in and switchout.
Under this process, first you have to redeem the investment from your existing funds and then re-invest into the second fund. But note that it may have to pay tax on exit load and capital gan, which can affect your returns. It is very important to understand switching cost before investment.
You can also switch in direct plan from regular plan
You also have the option to switch to a direct plan from a regular plan in a mutual fund, which is under the same fund. The regular plan includes distributor commission, while the direct plan does not happen, which reduces your total investment costs. However, in the direct plan you have to manage your portfolio yourself.
Benefits of switching in mutual funds
Over time, the performance of various asset classes such as equity, bonds and cash can change. Through asset rebalansing you can adjust your portfolio in such a way that it remains in conformity with your financial goals and risk tolerance.
Strategically switching funds can help take advantage of market trends. For example, if there is a decline in the stock market, you can shift from equity mutual funds to conservative options such as date or liquid funds. At the same time, during the market boom, switching to equity-focused funds from safe funds can maximize your return.
As your financial goals change, your investment strategy may also need a change. For example, when you get closer to retirement, you can prioritize capital safety instead of growth and switch from equity funds to date or low risk investment. On the other hand, if you want to increase the property aggressively, it can be more appropriate to switch to high risk equity funds.
If you are currently investing in regular mutual funds through distributors, then it can be beneficial to switch to the direct plan. The direct plan does not contain intermediate fees and they usually give better returns as they do not include commission fees. By choosing a direct plan, you can reduce your investment costs and increase your total returns.
Nabnita Dutta, a mutual fund analyst at Anand Rathi Wealth, said, “Before switching the mutual fund, it is necessary to decide why you want to do this. For example, rebeling the portfolio, conforming to your financial goals, or getting better returns. This clarity will prevent you from taking emotional or haste in a hurry. ”
He reported that switching involves expenses such as exit load and capital gains tax, which can affect your returns. If you have invested in equity mutual funds for less than a year, the exit load can be up to 0-2 percent. Apart from this, 20 percent tax is levied on short-term capital gains and 12.5 percent tax on long-term capital gains of more than Rs 1.25 lakh.
He said, “If you do not understand the expenses and effects of switching, unnecessary expenses can increase. Therefore, before switching, keep these things in mind. “