How to know when I should switch from a mutual Fund?
Monday, May 27, 2024
Have you been uncertain about when to make a better switch to other mutual funds out there? No wonder mutual funds have been the popular choice to make good returns over the years, but it matters as to what kind of mutual fund you have subscribed to make that good of a return. Haven't you invested in some goal to achieve?
If it hasn't met on an estimated time, or if it's even below your expected outcome, you should reconsider to check what's wrong with your mutual fund scheme.
Let's see when you should consider switching to a better mutual fund and how to switch in this article.
When should you switch?
The reasons can be multiple but let us narrow it down.
- You achieved a goal
Suppose your actual purpose changed and you are working towards a different one this time, then the existing mutual fund will not serve. As each mutual fund portfolio is carefully crafted based on your goals, risk appetite, anticipated returns, and time, the changed goal may not align with the previous scheme.
How do you know?
You very well know your goals and the time you need to achieve them.
- Underperformance
You certainly invested with some returns to achieve from the market but suppose yours was one of those mutual funds that underperformed consistently for 2 to 3 years. That calls for a switch.
How do you know?
Consistently take a look at your portfolio, depending on the type of mutual fund and assess its performance.
If you don't know how read our blog on this topic. (Link to underperformance blog)
- Others
You have some different reasons, such as switching to different asset categories, suppose your risk appetite changed and you want to switch to debt or hybrid funds as you deem fit. Or you may want to move from a regular to a direct plan because you want to save more on expenses.
How do you know?
This depends on your risk appetite and the returns you expect. Also, if you've incurred a higher expense ratio in a regular plan, you know you need to cut down on the distribution charges and switch to a direct plan.
Moving to another asset company, scheme, or plan works like a redemption process where you take out money from one to exit and make a new investment. Therefore, you need to pay exit load and capital gain tax based on the duration of your holding and the type of mutual fund.
Therefore, a switch has some exit charges that you must consider. If the switch is within the same mutual fund, the settlement complications may not be there.
What's the switch in mutual funds?
This option is made in lieu of all the disheartenment you felt with your previous one and to boost your returns by reallocating it to different schemes or assets. So without any hassles, you can do an online transfer of funds from one scheme to another.
To make your journey easy, a mutual fund switch option exists.
When you make a move to a new scheme, you must very well be aware of the new scheme's history of performance, the record of the fund manager, the risk-to-reward ratio, the expense ratio, the exposure of the portfolio to different types of assets, and see if all of them align with your goal, time to achieve, and risk appetite.
There are two methods of switching!
You can go about switching in 2 ways:
The popular online way
Simply log in to your mutual fund account via your mutual fund house. On the transaction page, find the option to switch mutual funds. In this option, you can pick the plan and choose a fund to which you'd like to switch. Following the further instructions, you'll be able to switch in a matter of 4 days.
The past way of offline
Visit your fund house's nearest branch, request a switch form to fill out, and initiate the process. The form may want you to fill in a few details pertaining to a switch, which may be details such as fund name, portfolio number, and others for switch information. Besides, even your broker can do this on behalf of you.
The switch gets easier with the option. But in most cases, when you are exiting, you need to exit with capital gain tax. So what's the tax imposed on you?
Taxes that come along no matter what.
When we say you need to pay capital gain tax, there are 2 types of it. Short-term capital gain tax and long-term capital gain tax.
Short-term capital gain tax is paid for shorter years, depending on the type of asset. For equity, the short term is before 1 year, and for debt, the short term is considered before 3 years. For hybrid funds, the short-term depends on what percentage of equity is in them; if it's 65% or more, then the short-term equity will apply; otherwise, the short-term debt will apply.
The long-term capital gain tax is paid for longer years. For equity, it is more than 1 year, for debt, it is more than 3 years; and for hybrid funds, if it's more than 65% of equity, the long-term equity will apply; otherwise, for debt.
Tax for long-term and short-term capital gains in mutual fund assets
The Wrap
When you see that your initial goal of investing in a mutual fund is not met, there is a need for you to switch to one that makes good returns. The switch option exists for you to use in such scenarios and there is no other time you find it beneficial.
Before you switch, look at all the aspects that are associated with the switch. If you've decided to do one, now you know when to switch and how to switch.
The point of investing is to grow your money, If you haven't been able to do so, at Green Portfolio, we have portfolio management services that have been consistent in growing the portfolio. In the meantime, we also have well-curated smallcases based on popular ideas that have the potential for good returns, you may check them out here.
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