Switching Mutual Funds

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THERE are various implications for an investor when they switch their mutual fund units from one fund to the other. While the performance impact and the expectation for growth is one thing, there is also the tax implication that this move will bring along. This might seem to be surprising for a lot of people but it is a vital factor that needs to be taken into consideration by the investor while undertaking any such plan. Here is a look at the issue and what the investor can do when faced with such a position.

Switch:

There can be different kinds of switch requests made by an investor.

One is the switch between two funds from the same fund house, whereby, the investor moves money from one to the other. The other way in which the switch is undertaken is when the amount is moved from one option of the scheme to the other. This can be something from the dividend option to the growth option, or even from the normal plan to the direct plan. There are various choices that the individual can exercise and it can lead to several possibilities that need to be taken into consideration.

Meaning:

When the switch is made, the meaning of the entire move has to be understood. This is important because the implication of the move will also be impacting several other areas. On one side, the choice is very clear for the investor because it means shifting from an investment choice to some other one where they would have the kind of exposure that they actually require. This is the basis for making the entire transaction and hence, is a vital factor.

Thus it could just be a switch between different plans in a fund and for the investor this is just a matter of convenience and not anything else because the entire investment remains the same. For the tax purposes, however, any such change actually means that the investor has sold one investment and then made an entry into another one so there is a larger implication to the entire move.

Impact:

The key impact of this entire situation is that when the investor does make such a move, the first thing that will be impacted is the tax working. The investor has to ensure that they calculate the capital gains or loss that has been incurred on the initial investment. This means checking the time period for which the investment was actually held to determine the nature of the capital gain or loss and then looking at the actual figures to see whether there is a loss or gain.

The problem in such a situation is that the investor might suddenly find that they have made a transaction that puts a tax liability on them and hence, there is a tax amount to be paid. This would happen especially when there is a transfer of amount from a debt fund to another debt or equity fund. The actual amount of the investment remains with the fund so there is no change here but this does not prevent the rise of a capital gain and tax implication, which could end up impacting the cash flow for the individual. The cash position is impacted because they have to shell out the tax even when the amount of investment remains with the fund. The calculation of the overall position and the manner in which this will impact their finances is something that they need to look at.

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