What is Redeeming and Switching in Mutual Fund Schemes?
Mutual funds is one of the best investment that help you grow your wealth. But how does one reallocate from one mutual fund to another? Let’s start with understanding what redeeming and switching in mutual fund schemes.
What is the difference between redeeming and switching?
When an investor exists one scheme and enters into a new one of any category under the same asset management company is known as switching. But, redemption is when an investor exits a scheme and the redeemed fund gets credited to their bank account.
An investor can switch between equity and debt fund as well as other categories like hybrid,mutli-asset, etc.
But, why would one think of switching or redeeming?
- To move from equity to debt or vice versa.
- To move from growth to dividend fund.
- To move to a fund with better returns.
- To switch from regular to direct funds.
The important factors to consider are:
1. Tenure of Investment:
Here, one needs to analyse and calculate how long the holding period is to accurately understand the impact of tax and exit load.
2. Exit Load:
Exit load is the fee charged if one redeems a scheme before a year. This fee can be different for different fund houses but is usually between 1-2%. It is vital to check how much the exit load is.
3. Tax Impact:
The tax impact is different based on if one has invested in Equity or Debt. For equity, long term capital gains (after a year of holding) is taxed at 12.5% with exemption up to 1.25 lakh, while short term capital gain will be taxed at 20%. For debt fundsbought on or after April 2023 will be taxed at marginal rateregardless of holding period, invested before april 2023 will be taxed at 20% for short-term & 12.5% for long-term.
4. Asset Allocation Strategy:
Investors are advised to diversify investments across the asset classes have low correlation each other, as like asset mix of 80:20 in equity & debt to mitigate the volatility in the portfolio. Investors should periodically review the portfolio and reallocate the investments according to their risk.
After considering the above mentioned things, here’s how one can switch or redeem:
One of the way is to opt for the switching out option available at the broker’s portal or opting for a systematic withdrawal plan which lets you withdraw at a specific interval.
There is also the option of switching within the same mutual fund scheme. However, one thing to keep in mind is that it will be treated like exiting a Mutual fund and entering into a new one as the ISINs are different.