Inter-scheme switch in mutual funds

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An inter-scheme switch is a transaction in which an investor moves units from one mutual fund scheme to another scheme offered by the same AMC (asset management company). Both the source and destination schemes are managed by the same fund house and administered by the same Registrar and Transfer Agent (RTA). The transaction is processed as a simultaneous redemption from the source scheme and subscription to the destination scheme.

Inter-scheme switches are also referred to as intra-AMC switches. They are the most operationally straightforward type of switch because the RTA maintains records for both schemes and can execute both legs in a single internal transaction without involving external bank transfers.

Operational mechanics

  1. Instruction submission: The investor submits a switch request through the AMC’s direct portal, distributor platform, MFCentral, or a physical switch form submitted to the AMC/RTA office.
  2. Cut-off time: The instruction must be received before the applicable cut-off time for both source and destination schemes (3:00 p.m. for equity/hybrid/debt schemes under standard rules). See applicable NAV for details.
  3. Source scheme redemption: Units in the source scheme are redeemed at the applicable NAV. Exit loads (if any) are deducted.
  4. Destination scheme subscription: The net redemption proceeds (after exit load) are applied to subscribe to units in the destination scheme at the destination scheme’s applicable NAV.
  5. Confirmation: The investor receives confirmations for both the redemption and the subscription. Units in the destination scheme are allotted and reflected in the folio.

No bank involvement

Unlike an inter-AMC migration, the investor’s bank account is not involved in an inter-scheme switch. The proceeds from the source scheme redemption do not leave the AMC’s system; they are directly applied to the destination scheme subscription. This makes inter-scheme switches efficient and eliminates the gap risk (the period when money is in transit and not earning returns) that characterises inter-AMC switches.

Tax implications

An inter-scheme switch is a taxable redemption of the source scheme units:

  • Each redeemed unit triggers capital gains tax based on the holding period (from the purchase date of that unit) and the scheme type.
  • For equity/hybrid equity-oriented funds: STCG at 20% (under 12 months); LTCG at 12.5% above Rs 1.25 lakh (over 12 months).
  • For debt funds (units purchased after 1 April 2023): Gains taxed at slab rate.

The fresh subscription in the destination scheme creates a new cost basis (at the destination NAV) and starts a new holding period for future capital gains calculations.

Exit load considerations

Exit loads on the source scheme apply to switch redemptions. Many equity schemes charge a 1% exit load on redemptions within 12 months of purchase. Switching before the exit load period expires will reduce the effective redemption proceeds.

Some AMCs waive exit loads on inter-scheme switches between specified scheme pairs (e.g., between a liquid fund and an equity fund within the same AMC), particularly on STP-linked switches. Investors should verify the exit load schedule in the scheme’s SID before switching.

Common use cases

  • Rebalancing an equity-heavy portfolio by switching from an equity fund to a debt or hybrid fund.
  • Moving from a regular plan to a direct plan of the same scheme (treated as an inter-scheme switch for tax purposes).
  • Switching between growth and IDCW options of the same scheme.
  • Moving between scheme categories as the investor’s risk appetite or investment horizon changes.
  • Using an STP (automated periodic inter-scheme switches) to deploy a lump sum from a liquid fund into an equity fund over time.

References

  1. SEBI Master Circular for Mutual Funds (2024).
  2. SEBI (Mutual Funds) Regulations, 1996, switch provisions.
  3. Income Tax Act, 1961, capital gains on redemption.

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