Switch
A single mutual fund transaction that redeems units from one scheme (or option) and invests the proceeds in another on the same date — a redemption and a purchase rolled into one.
In plain language
Suppose you hold an equity fund and want to move part of the money into a debt fund of the same mutual fund. You could redeem, wait for the money to reach your bank, and then apply afresh. A switch does it in one step.
The workbook's definition: a switch is a redemption and purchase transaction rolled into one, and can be done for any amount and on any date as required by the investor.
The scheme you leave is the source scheme; the one you enter is the destination or target scheme. A switch can also be made between options of the same scheme — for example, from a growth option to a dividend option.
How it works
- Instruction. The investor uses a transaction slip, giving the existing scheme, the new scheme and the amount to be switched.
- Redemption. On the date the switch request is submitted, the amount is redeemed from the existing scheme at the applicable NAV after considering loads.
- Purchase. The same amount is invested into the new scheme at its current NAV.
- Confirmation. A statement of account is sent with the details.
Switch versus STP. A Systematic Transfer Plan moves a specified sum from one scheme to another within the same fund house periodically — each transfer is a redemption from the source and an investment into the destination, "in effect an SWP from the source scheme and an SIP into the destination scheme". A switch is the one-off version. The workbook is explicit that a switch "is a single transaction executed on a given date and is not a series of transactions".
| Switch | STP | |
|---|---|---|
| Number of transactions | One | A series, on specified dates |
| Amount and date | Any amount, any date | Specified sum, fixed schedule |
| Mechanics | Redeem source at NAV after load, buy destination at NAV | Same, repeated each date |
The formula
Units redeemed from source = Switch amount ÷ (Source NAV adjusted for exit load)
Units bought in destination = Switch amount ÷ Destination NAV
A worked example
Illustrative NAVs and load. Rahul switches Rs 2,00,000 from an equity scheme to a short-term debt scheme of the same fund house.
- Equity scheme NAV: Rs 40.00; assume an exit load of 1 per cent applies to his units.
- Debt scheme NAV: Rs 25.00.
Redemption leg:
Redemption price = Rs 40.00 × (1 − 0.01) = Rs 39.60
Units redeemed = Rs 2,00,000 ÷ 39.60 = 5,050.505 units
Purchase leg:
Units bought = Rs 2,00,000 ÷ Rs 25.00 = 8,000 units
The number of units redeemed and bought differ, because they are priced off two different NAVs. One slip, one date, one statement.
Compare an STP of Rs 10,000 a month for 6 months — the workbook's example runs from a liquid fund to an equity fund starting 5 September. That is six transactions, each at that date's NAVs. Rs 60,000 in total moves, but not as a single switch.
Why NISM asks about it
Chapter 5 (Mutual Funds) has a section of its own, 5.8 "Switches", placed immediately after 5.7.3 on Systematic Transfer Plans. Questions test the definition (redemption plus purchase in one), that a switch is a single transaction and not a series, the source/destination vocabulary, the growth-to-dividend-option case, and that the redemption is at NAV after loads.
Common exam traps
- A switch is one transaction, not a series. A series of transfers on set dates is an STP.
- It is still a redemption and a purchase. Loads on the source scheme are considered; do not treat a switch as a mere relabelling of units.
- Any amount, any date — unlike an STP's specified sum and schedule.
- Switches can be between options of the same scheme, not only between schemes.
- Units in ≠ units out. Two NAVs are involved.
- Source = where money leaves; destination/target = where it goes.
Where this is taught
- Series V-A · Chapter 9: Investor Servicesintroduced here
- Series II-B · Chapter 14: Financial Transactionsintroduced here
- Series X-A · Chapter 11: Mutual Fundintroduced here
- Series XII · Chapter 5: Mutual Fundsintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Systematic Withdrawal PlanA standing instruction to redeem a set amount — or only the appreciation — from a mutual fund scheme at a chosen frequency, used to manufacture a regular income in retirement.
- IDCWThe renamed dividend option of a mutual fund scheme — a payout that is part income and part return of your own capital, which is why the NAV falls by exactly the amount distributed.
- Official Point of AcceptanceA location a mutual fund has formally designated to receive transaction requests, where the application is time-stamped — and that stamp, not the moment the investor handed the form over, decides which NAV applies.
- RebalancingRestoring a portfolio to its target asset allocation after markets have pushed it away — which mechanically sells what has risen and buys what has fallen, with no view on market direction.
- Stamp dutyA levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
- Transfer of IDCW planA facility that automatically invests the IDCW (dividend) declared in one scheme into another scheme of the same mutual fund, on the next business day after the record date.