Glossary of Mutual Fund Terms

Switching refers to the process of shifting your investments from one Mutual Fund scheme to another within the same Mutual Fund. You can switch or move your investments from one scheme to another when both schemes are managed by the same AMC i.e. they belong to the same fund house. To switch funds, the investor needs to fill up a switch form specifying the amount/number of units to be switched from the source scheme and name of the destination scheme.

Switching is considered as a sale or redemption for the source scheme and a purchase for the destination scheme. Hence, one must fulfill the minimum investment amount criteria for both switch-in and switch-out schemes. There may be implications of exit-load and capital gains tax while switching since it is a sale transaction for the source scheme.

Switching is currently not possible between two schemes belonging to two different fund houses.

A Systematic Transfer Plan (STP) allows you to transfer a fixed number of units or amount from your investment in one Mutual Fund scheme to another scheme managed by the same fund house on a prespecified day every month.

You can start a STP by investing a lumpsum amount in a mutual fund scheme and giving instruction to the fund house to transfer a fixed no. of units or amount from this investment to the destination scheme. As a result, your account balance in the source scheme i.e. the scheme in which you had made the lumpsum investment gradually decreases every month while your investment in the destination scheme increases gradually every month. The STP automatically stops when all the money from the source scheme has been transferred to the destination scheme over a period of time.

STP is a risk mitigation strategy where you move your investments from an equity fund to a debt fund or vice-versa depending on the market outlook you hold. STP is usually done by investing a lump sum amount in a debt scheme and transferring the money over time to an equity scheme or vice-versa.

STP is best advisable when you have a large sum of money to invest but are not sure how the market will move once you’ve invested your money. So, you gradually move or switch your money from one scheme to another in a phased manner over time.