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Be switch savvy

In keeping with your age, risk profile and changing requirements, you need to alter this ratio with time.

Asset rebalancing is important for a mutual fund portfolio, say financial experts, because the right asset mix helps you make the most of your investment. If you think that your investment worries are over after you buy a mutual fund plan with an inbuilt debt-equity ratio, you are mistaken. In keeping with your age, risk profile and changing requirements, you need to alter this ratio with time. However, many people find the process of redeeming and buying units tedious and time-consuming.

The Switchover
Here's how to shift from a dividend to a growth plan of an equity fund.
  Dividend Growth
No. of units purchased 1,000 1,000
Entry NAV (Rs) 12 12
Purchase cost (Rs) 12,000 12,000
Switch (units) -500 500
NAV on switch date (Rs) 15 15
Total units 500 1,500
Taxes applicable* (Rs)   254.9
Dividend (per unit) (Rs) 2 0
Ex-Dividend NAV (Rs) 13 15
Exit NAV** (Rs) 16.25 18.75
Gain (Rs) 3,125 10,125
Net gain after tax (Rs) 3,125 9,870
EFFECTIVE GAIN % 52.08 54.83
Assuming dividends are not reinvested. * STCG of 16.995%. ** NAV grows at 25% after dividend. Calculation assumes that dividends are declared after the switch. No entry-exit loads considered.

To rebalance a portfolio, investors need to forward a redemption request to the fund house for the scheme that they want to exit. The redemption proceeds are usually received within three or four days, after which one can put in an application for buying the desired number of units. The entire exercise is cumbersome and spread out over several days. To facilitate such transactions, mutual funds offer a facility called 'switch'.

Switch is a single transaction that combines redemption and purchase of units. While an interscheme switch is carried out between specified schemes of a fund house, an intra-scheme switch is done between fund options of a scheme from, say, dividend to growth. A switch can be conducted by putting in a request specifying the details of the scheme/option, the number of units/amount to be redeemed, and the scheme/option to be invested in. The fund carries out the redemption and purchase simultaneously. The transaction slip that accompanies the investor's account statement is used for conducting inter-scheme and intra-scheme switch transactions.

This facility is offered only on certain schemes, so check whether the plan you are invested in has the provision to shift to another of your choice. While there is zero entry load on investing directly through the fund house, exit loads are still applicable for switches. Similarly, you are liable to pay taxes on redemptions in both inter- and intra-scheme switches.

Also, remember that you need to specify the number of units or amount to be redeemed. The number of units allotted will not be the same as the number of units redeemed, and will depend on the net asset value (NAV) of the scheme you invest in. For instance, if the investor switches 100 units from the dividend option of a scheme with an NAV of Rs 20 to the growth scheme with an NAV of Rs 25, the number of units allotted to the investor after the switch will be 80 [(100 x Rs 20)/ Rs 25].

On the flipside, a switch can be conducted only for the schemes that are offered by a fund house. This restricts the investor's choice because even if there are better options available outside the fund house, he cannot consider these.