A switch can help you achieve your financial goals
BLURB: Goals ensure that you remain on track while investing.
Many prefer to switch jobs in pursuit of growth in their careers. For them it not only opens doors of opportunities and increase earnings, it also enriches one in terms of learning in life. Though one may differ from the view of job switchers, most of us would benefit from switch facility in mutual funds.
Switch – is just a transfer of money from one scheme to another. If it is that simple, why would someone want to spend time understanding more about it, you may ask. The catch here is - though the technology has made the process very simple, one should know how to use a switch to his advantage.
Before we get into the benefits of switch lets understand the operational and more technical aspects of switch. Switch from one scheme to another can be done by submitting a prescribed form to mutual fund. It can also be done online with a click of a button.
A switch technically means a sell transaction and fresh purchase. When you switch from scheme A to scheme B, the mutual fund will deduct exit load, if applicable on investments in scheme A. You will also be liable to pay taxes on capital gains, if any. Also the switch into scheme B will be treated as a fresh purchase. Don’t get worked up with all this.
Let’s understand this with an example. Kabir invested Rs 1 lakh in a Balanced Fund-A on 1st January 2017. It grows to Rs 1.15 lakh. He switches all his investments in Balanced Fund A to Bond Fund-B on 7th July 2017. The balanced fund stipulated an exit load (a penal charge for early exit) of 1% at the time of investment if Kabir chooses to exit before one year from the date of his investments. Mutual fund will deduct an exit load of 1% out of the outstanding amount (1% of Rs 1.15 lakh = Rs 1,115) as he has opted to switch before completing one year. Kabir is also expected to pay short term capital gain tax at 15.45% on his gains in balanced fund, as it is a short term capital gain (on an Equity MF investments held for less than one year). Also he has to hold his investments in Bond Fund B for at least three years startingJuly 7, 2017 to be eligible for the tax treatment of long term capital gains.
If you have understood it, let’s look at how a switch can be better utilized by you in your overall financial planning.
Asset rebalancing, is an act wherein you move from one asset class to another to correct any unwanted tilt in your stated asset allocation. For example, assume that you started with a 50:50 asset allocation in equity and debt. Over a period of last one year, equity has given 20% return and debt has given 10% return. In this case the asset allocation becomes 52:48. Here you have to switch out of the equity to debt to reach to the original asset allocation of 50:50. A timely switch thus can correct tilt in the portfolio.
You can also use systematic transfer plan – effectively a series of switches from one scheme to another, to gradually invest in a scheme. This can either be used to transfer money from bond funds to equity funds or the other way round. Switch thus can be used both ways – to move money from less risky investment option to more risky (and more rewarding) investment options and the other way round.
If you have a financial goal in mind and you have been investing for the same in a mix of equity and balanced funds, regular review of your investment plan will tell you that you are closer to your goal, in such circumstances, it makes sense to switch your money into a less risky option such as liquid fund to ensure that your kitty does not get exposed to vagaries of stock market.
You can also use switch based on an underlying condition – say market falling below a particular level or a scheme NAV reaching a particular level. These are called trigger based switch. For example, you may instruct the fund house to switch your investment of Rs 1 lakh from liquid fund to an equity fund, if Nifty goes below 8500. This can help you to go for bottom fishing. If you opt for a trigger based switch to a liquid fund from an equity fund if Nifty crosses 10000, then you opt to cash out in an unemotional manner.
But do not go over-board with switches. You have already seen that each switch comes with costs – exit loads, taxes and possible opportunity lost. Switch wisely in jobs and mutual fund schemes too.