Switching between schemes

A switch lets you move money from one scheme to another in a single instruction, without the money passing back through your bank account. It is convenient, and that convenience hides something worth understanding: a switch is a redemption of the first scheme and a fresh purchase of the second, done together. Everything true of selling is therefore true of a switch.

One instruction, two transactions

Under the surface a switch is two transactions. The units you hold in the first scheme are redeemed at that scheme’s NAV, and the proceeds buy units of the second scheme at its NAV. Each leg is priced by its own cut-off time, so a switch can straddle two pricing days — you may exit on one day’s NAV and enter on the next. It is not an instant, price-neutral transfer.

It triggers the same tax event as selling

Because the first leg is a genuine redemption, a switch realises any gain or loss on the scheme you leave, exactly as selling for cash would — the mechanism is in how equity funds are taxed. People are often caught out here, assuming that because no money reached their bank there was no sale. There was. This is the mechanism, not tax advice, and it is the single most important thing to know before switching a large amount.

Exit load applies to the leg you leave

A switch out of a scheme still within its exit-load period incurs that load, just as a redemption would, and a switch out of a locked-in scheme such as an ELSS is blocked until the lock-in ends. The charge and the timing sit on the scheme you are leaving, so check them there before you switch, not on the one you are moving to.

When people use a switch

Switches are commonly used to move between the options of a scheme, to shift money gradually from one asset type toward another as a goal nears, or as part of rebalancing a mix that has drifted. A systematic transfer plan (STP) is simply an automated series of switches, moving a set amount on a schedule. In every case the same rule holds: each move is a sale and a purchase, with the tax and load that implies.

What to check before you switch

Before switching, check three things on the scheme you are leaving: whether it is still within an exit-load period, whether any lock-in applies, and what gain the sale would realise. Whether a switch itself is the right move depends on your own goal and circumstances; this article explains what a switch does, not whether you should make one.