Here are some frequently asked questions about mutual fund switch transactions and responses to them.
What is a switch mutual fund transaction?
Investors in a scheme may want, at some time, 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 executing switches are available separately. You can switch out a specific amount or a certain number of units. The scheme documents would normally 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. Under this facility called Systematic Transfer Plan, unit holders can opt to transfer a fixed amount at regular intervals to designated open-ended schemes. Investors opting for this facility are therefore systematically switching amounts/units from one scheme to another as an investment strategy.
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 be required to fill and submit the STP registration form to the mutual fund to enrol into this facility.
What are triggered switches?
Some mutual funds offer a trigger switch facility to investors. Under this, a switch is automatically triggered in the investor’s folio on the occurrence of a certain event. Investors can choose a specific target return of the investment as well.
If this is achieved in the scheme, e.g. a gain of 25 per cent, then either the gain or the complete fund value (as per the investor’s choice) can be switched to any of the schemes allowed by the fund house. 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. How can an option be allotted without the mutual fund checking with me? Now I wish to change the option to growth. Will this be taken as a switch?
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 document.
Even under the dividend option, investors need to select either payout or reinvest.If you do not specify your option, the default as per the terms of the offer document of the scheme will be allotted.
Any change from dividend payout to reinvest is carried out by giving a simple written request. It will have no implication on the number of units in your account and future dividends will be reinvested.
However, changing to ‘growth’ has other implications.
The dividend and growth options are technically treated as two different plans, with different applicable NAVs. A change of growth to dividend would be considered as a switch — i.e. redemption from one scheme, dividend payout, and a purchase into the other, growth.