Fund basics: Switch transactions

Investors may sometimes want to shift investments, partly or wholly, from one scheme to another. Here are frequently asked queries in this context.

What's a Switch Transaction?

Investors in a scheme may want to shift either the whole or part of the investment into another scheme of the same mutual fund. 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 switches 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, i.e., automate the process to happen at regular intervals?

Yes. Such a facility is available and is called Systematic Transfer Plan (STP). This is a facility wherein unit holders of designated schemes can opt to transfer a fixed amount at regular intervals to designated open-ended schemes. Investors opting for this therefore systematically switch amounts from one scheme to another as an investment strategy. This facility is used by investors for optimal use of funds. For instance, an investor may keep funds in a liquid scheme and opt to transfer or switch to an equity scheme every month on a pre-defined date. Investors would have to fill and submit the STP registration form to the mutual fund to enrol for the same.

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 a redemption or switch to another scheme if a certain appreciation level is attained. Investors can choose a specific percentage target return. If this is achieved in the scheme, for example, a gain of 25 per cent, then either the gain or the complete fund value (according to investor choice) can be redeemed or switched to 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 by default. Now I wish to change the option to Growth. Will this be taken as a Switch?

Mutual funds usually give investors the choice of a Dividend or Growth option. Under the Growth option, dividend is not paid to the investor and the value grows along with growth in NAV. Under the Dividend option, 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 Reinvest option. If you do not select either the Payout or the Reinvest option, the default for the scheme will be allotted. Any change from Dividend Payout to Reinvest can be done by giving a simple written request. It will have no implications 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 NAVs. A change would be a Switch – i.e. 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. Views expressed are general practices in the MF industry and may vary on a case to case basis.

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