Hello Readers!
Equity Mutual Fund Investors, who have been investing in Equity Funds have a list of funds through which they want to get out of. There are various reasons behind their motive to get out of these funds.
Some possible reasons are:
- The Lack of performance of the fund over a good period says, for 3-4 years the fund is performing below its benchmark.
- The uniformed decision taken by their fund manager is one of the biggest reasons and many.
- Some investors want to switch because they have a number or say too many funds in their portfolio which they are looking to consolidate.
What do investors generally do?
The decision taken by the investors to came out of their fund depends on their way of investing. In case if investors have aligned their goals with their Equity funds, instead of switching they would like to stay invested in the same fund.
In case if the investor has been investing in Equity Funds via SIP, they might tempt to switch their fund and for that, they may follow the following processes:
- First, they will stop their exiting SIP plan in their Equity mutual fund.
- After that, they will fill the redemption request and redeem their entire invested amount.
- After that, they will wait for the money to get deposited in their bank account.
- Then they will invest their entire money from previous investment into new replacement funds.
- Finally, they will start a new SIP in the new fund.
The above process is actually not incorrect if you had just started investing and your accumulated investment is not significant.
However, there is also some kind of problem that you may probably face, if you had been investing in this fund for a while.
In case you had been investing for a period of years with a significant SIP amount then you would face 3 challenges:
Tax applicable to your investment
In case if you are taking your money out of your Equity funds after one year you will be liable to pay 10% of your gains getting taxed if they exceed 1 lakh (Long Term Capital Gains Tax). And if you withdraw your investment before a period of the one you will be liable to pay 15% tax on gains from investment.
Exit Load
There are some Equity funds that still charge a kind of Exit load. Out of these, most of the Equity funds do not any exit load after 1 year of investment, while some fund doesn’t charge exit load after 2 or 3 years of investment.
Time spent out of the market
The time period between withdrawal and start of the new SIP, for which you remain out of the market, can give you significant market movement options but you might miss them because you are out of the market.
Well, if we conclude from these challenges, simply we can this as a transaction cost that we pay while moving our holdings. However, we can skip this cost, if we plan our switching of funds smartly.
What is the alternative?
Well, here, you have to look for a smarter way where you won’t have to pay transaction costs. Here we suggest you before stopping your earlier SIP in the old fund, start a new SIP in the fund you want to move in.
This move ensures that you are starting in the better fund and your future investments are aligned to your new selection.
What to do with my holdings in the old fund?
We suggest do not move out all your holding at one time, instead of that spread your money movement out of your old fund to the new, over a period of time. Before that do assess your capital gains.
For any kind of investment query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).