Manage your portfolio with a 'switch'

Investors think of rebalancing portfolios if they find the asset allocation has become skewed because of a run up in a particular asset class.

For instance, when equity markets go up, the investment in equity funds also increases in value and may now form a greater proportion of the total portfolio. Investors who find this risky may want to sell equity funds and invest in debt funds.

Or, investors who are willing to take risk for better returns may want to reduce their debt fund holdings, and invest in equity funds.

An investor who is looking for a payout may switch from a growth option to dividend option. Investors may switch between options for the tax implication also.

For instance, investors in debt funds who are in the 10 per cent tax bracket, the growth option may be more suitable than the dividend option where there is a dividend distribution tax of 12.5 per cent.

To rebalance, portfolio investors first have to put in a redemption request from the scheme they want to exit. Redemption proceeds are received within a week. Then the application for buying units are put in. The entire exercise is time consuming and cumbersome. To facilitate such transactions, mutual funds offer a facility called a switch.

What is a switch?

A switch is a single transaction that combines a redemption and purchase transaction into one. An inter-scheme switch is done between specified schemes of a fund house. An intra-scheme switch is done between options of a scheme.

A switch can be done by putting in a request specifying the details of the scheme/option and number of units/amount to be redeemed, and the scheme/option to be invested into.

The MF gives effect to the redemption and purchase simultaneously. The transaction slip that accompanies the investor's account statement is used for doing inter-scheme and intra-scheme switch transactions.

Points to remember

Check for availability. The facility is offered only on certain schemes. Investors need to check if the schemes that they have invested in have the provision to switch out into the scheme of their choice.

Loads and taxes. Loads as applicable on the schemes will be applicable on the switch transaction also. MFs may exempt intra-scheme switches from loads. But inter-scheme switches are subject to entry and exit loads. Similarly, investors will be also liable to pay taxes on redemptions in both inter and intra scheme switches.

Units redeemed and allotted. Investors have to specify the number of units or amount to be redeemed. The number of units allotted will not be the same as the number of units redeemed.

It will depend upon the net asset value of the scheme into which investment is being made. For instance, if the investor switches 500 units from the dividend option of a scheme with an NAV of Rs 24 into the growth scheme with an NAV of Rs 40, the number of units allotted to the investor after the switch will be 300 units [(500 * Rs 24)/ Rs 40].

Selected occasion. The switch can be used only between the schemes of a fund house. It restricts the investor's choice to one fund house irrespective of the performance of the schemes.