Switching Between Schemes — It Is Two Transactions, Not One

Units in the first scheme are redeemed at that scheme applicable NAV, and the proceeds are used to buy units in the second at its applicable NAV. Two transactions, recorded separately, appearing separately on your statement.

Which NAV applies to each follows the ordinary timing rules, so the two legs may not fall on the same day, and the money is briefly out of the market in between. Our page on the cut-off time covers how that works.

A switch is generally offered between schemes of the same fund house. Moving money to a different fund house is a redemption to your bank followed by a fresh investment, which takes longer and puts the money in your hands in between.

Both attach to the sale leg and both are avoidable if checked in advance.

Exit load. If the units being sold are within the scheme load period, the charge applies. With a SIP this catches people repeatedly, because each instalment has its own holding period, so a switch out of a running SIP often hits the load on the most recent months even when the scheme is years old. Our page on the expense ratio covers the ongoing charge, which is a separate thing.

Tax. The redemption leg is a sale for tax purposes whether or not any money reached your account. That is the part people find hardest to accept, since nothing was received and something is nonetheless due. Our page on mutual fund taxation explains the structure, and we are distributors rather than tax advisers.

Three situations where we would not argue with somebody who wanted to switch.

• Regular to direct plan, for somebody who has decided to manage things without a distributor. We have written honestly about that on direct versus regular plans, including the part where it costs us the business.
• A wrong category for the horizon, such as long-horizon money sitting in something built for parking, or the reverse. Fixing that is worth the cost of fixing it.
• Reducing genuine overlap, where several schemes hold much the same companies and the household believes it is diversified.

What these share is that the switch fixes a structural problem rather than chasing a number.

And these are the ones we see most often, unfortunately.

Moving to whichever scheme has done best recently is the most expensive habit available, because it means selling after a weak stretch and buying after a strong one, repeatedly, with a charge each time. Our guide on why somebody else fund did better covers where that impulse comes from.

Switching categories because of a view about where markets are heading is the same mistake with a more sophisticated explanation attached. And switching because a scheme had one poor year against its benchmark rarely clears the threshold our page on when to sell sets out.

The honest test is whether you could explain the switch to yourself in a year in terms that do not mention recent performance. If not, it is probably a reaction rather than a decision.

Three ordinary-sounding requests that are switches with all the consequences.

Changing the option from IDCW to growth or back, within the same scheme, is a switch between options. The portfolio does not change and the transaction is real, as our page on growth versus IDCW notes.

Changing the plan from regular to direct is a switch, even though the scheme is identical.

A transfer plan is a series of switches, one per instalment, from the source scheme into the target. That is the point of it, and it means the consequences arrive in instalments too, which our page on the systematic transfer plan covers.

Here is the consequence people discover afterwards, and it is the strongest argument against switching casually.

The units you buy on the purchase leg are new units bought today. Their holding period starts now, not when you first invested. So a holding you had patiently built over four years becomes, for exit load and tax purposes, a holding you started this week.

That means a second switch a few months later runs into the load and the short holding period all over again, on money that has been invested continuously for years. Somebody who switches three times in two years can pay charges each time while never having been out of the market at all.

It also affects the plan. If money was going to be needed in eighteen months and you switch today, the holding period on the new units may not have reached where you wanted it by then. Worth checking against the date before deciding, which our page on when to sell sets out.

Four checks, in order, and the first two take a minute each.

• What is the exit load on the units being sold, given when each was bought?
• What is the tax position on the sale leg?
• Is the reason structural or is it about recent performance?
• Would doing nothing be worse? Often the honest answer is no.

Switching is a normal transaction and we process them without argument. What we will do is ask the third question, because somebody switching for the fourth time in three years is usually paying charges to stay in the same place. If you want to go through what you hold before deciding, get in touch.