How to switch between funds: Business Line

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A fixed amount may be transferred or switched to an equity scheme from a liquid scheme every month.

Investors in a scheme may want to shift either the whole or part of the investment into another scheme of the same fund house. Normally this would mean redeeming units from the original scheme, waiting for the proceeds to be credited into the bank, and later filling another transaction slip and making an investment in the new scheme.

To simplify this process when the investments are within the same mutual fund, investors have the facility of filling one transaction slip indicating the scheme and amount/units they wish to switch out (redeem) and the scheme into which they wish to switch in (purchase).

Transaction slips for switch are available separately. You can switch out an amount in rupees or a certain number of units. The scheme documents would specify the minimum amounts.

Is it possible to switch systematically, that is, automate the process to happen at regular intervals?

Yes, through a facility called systematic transfer plan. Under this facility, unit holders of designated schemes can transfer a fixed amount at regular intervals to the designated open-ended schemes. This facility is used by investors for optimal use of funds.

For example, an investor may keep funds in a liquid scheme and opt to transfer or switch to an equity scheme every month on a predefined date.

Investors would have to fill and submit a registration form for the transfer plan to the mutual fund to enrol for it.

What are triggered switches?

Some mutual funds offer a trigger facility to investors. Under this, a switch is automatically triggered in the investor folio on the occurrence of a certain event. For example, an investor can opt to trigger redemption or switch to another scheme if a certain appreciation level is attained. Investors can choose a target return.

If this is achieved in the scheme, say, gains by 25 per cent, then either the gain or the complete fund value (according to the investor choice) can be redeemed or switched to the any of the schemes notified.

Triggers, thus, act as financial-planning tools.

I had inadvertently not filled in the scheme option in the application form and was allotted dividend payout. Now I wish to change the option to growth. Will this constitute a switch?

Mutual funds usually give investors a choice between dividend and growth options. Under the growth option, dividend is not paid to the investor and the value grows along with growth of net asset value. Under dividend, there are two sub-options — payout of the dividend or re-investment of the dividend in the same scheme.

If an investor does not select the option in the application form, a default option is allotted, which may be either growth or dividend as mentioned in the scheme documents. Even under the dividend option, investors would have to select either payout or reinvestment.

If you do not select payout or reinvestment, the default for the scheme will be allotted.

Any change from dividend payout to reinvestment would be by giving a written request. It will have no implication on the number of units in your account and future dividends would be reinvested.

However, changing to growth would have other implications. The dividend and growth options are treated as two different schemes, with different net asset values. A change would be a switch — that is, redemption from one scheme — dividend payout and a purchase into the other, growth. This change would have to be effected by submitting a switch request form.

(Contributed by CAMS Viveka, an investor education initiative from CAMS. The views expressed are general practices in the mutual fund industry and may vary acoording to the case.)