Switch in mutual funds: intra-AMC, inter-scheme and inter-AMC

A switch in mutual funds is the operation of redeeming units from one scheme and using the proceeds to subscribe to another scheme. The switch can be:

• Intra-AMC, inter-scheme: Source and target are both at the same AMC but different schemes (e.g., HDFC Liquid Fund to HDFC Flexi Cap Fund).
• Intra-AMC, intra-scheme, inter-option: Source and target are the same scheme but different options or plans (e.g., HDFC Flexi Cap Growth to HDFC Flexi Cap IDCW).
• Inter-AMC: Source and target are at different AMCs (e.g., HDFC Liquid Fund to ICICI Prudential Flexi Cap Fund). This is operationally a redemption plus a fresh subscription rather than a single integrated switch.

For tax purposes, every switch is treated as a redemption from the source plus a subscription to the target. Capital-gains tax applies on the source redemption, even though the proceeds are immediately redeployed. This article covers the switch mechanics, tax treatment, exit-load implications, operational considerations across direct-plan platforms, and the comparison with STP for systematic switches.

Types of switches

Intra-AMC, inter-scheme switch

The most common switch operation: redeeming from one scheme and subscribing to another at the same AMC. The operation is a single transaction at the AMC level, executed at the applicable NAVs of both schemes on the switch date.

Examples:

• HDFC Liquid Fund → HDFC Flexi Cap Fund (deploying liquid corpus into equity).
• SBI Bluechip Fund → SBI Small Cap Fund (rebalancing equity allocation).
• ICICI Prudential Long Term Equity Fund (ELSS) → ICICI Prudential Multi Cap Fund (after ELSS lock-in expiry).

Plan switches (regular to direct, direct to regular)

A common switch operation is moving between regular plan and direct plan of the same scheme. This is a plan-switch:

• Regular to direct: Often done to reduce TER and improve net returns. Coverage: direct-to-regular and regular-to-direct switch implications .
• Direct to regular: Less common, typically when the investor decides to engage a distributor.

The regulatory treatment depends on the specific AMC’s framework; some AMCs allow seamless plan switches, others treat them as separate redemption + subscription.

Option switches (growth to IDCW or vice versa)

Switching between the growth option and the IDCW option of the same scheme. The tax treatment is the same as any other switch: capital gain on the redemption, fresh subscription to the target option.

Inter-AMC switch

Operationally an inter-AMC switch is not a single integrated transaction but two separate operations:

1. Redeem from the source AMC’s scheme.
2. Wait for redemption proceeds in the bank account (typically T+2 to T+3 days).
3. Subscribe to the target AMC’s scheme using the bank-account proceeds.

The intervening cash period means inter-AMC switches lose a few days of market exposure and may have applicable-NAV differences across the gap.

Tax treatment

Each switch is a redemption plus subscription

For tax purposes, every switch is treated as:

1. Redemption of source units: Capital-gains tax applies on the difference between source-scheme NAV at switch and the cost basis (purchase NAV) of the source units. FIFO ordering applies.
2. Fresh subscription of target units: A new lot is created at the target-scheme NAV with a fresh holding-period clock.

Equity-oriented source schemes

For equity-oriented schemes where the source units have been held >12 months, the switch triggers LTCG under Section 112A at 12.5 per cent on gains above Rs 1.25 lakh per FY (rate effective July 2024). Source units held <12 months trigger STCG under Section 111A at 20 per cent.

Debt-oriented source schemes

For debt-oriented schemes purchased on or after 1 April 2023, the switch triggers slab-rate tax on the entire gain (no holding-period preference). Coverage: debt mutual fund taxation 2023 .

Tax inefficiency of frequent switching

Frequent switching is tax-inefficient because each switch crystallises gains. An investor who buys-and-holds a single scheme defers all capital gains until eventual redemption; an investor who switches frequently pays tax on each switch’s gains.

Exit-load implications

If the source units are within the exit-load period (commonly 12 months for equity schemes), the switch triggers the exit-load charge. The exit load is deducted from the source-redemption proceeds, reducing the amount available for target subscription.

Examples of typical exit-load schedules:

• Equity schemes: 1 per cent on redemption within 12 months, zero after.
• Hybrid schemes: Vary by sub-category, often 1 per cent within 12-18 months.
• Liquid schemes: Typically zero from the day after purchase.

ELSS schemes have a 3-year lock-in (which is an absolute hold, not an exit load), so switching out of ELSS during the lock-in period is not permitted.

Operational mechanics

Direct-plan platform switches

Major direct-plan platforms support switches:

• Zerodha Coin : supports intra-AMC switches; inter-AMC requires manual redemption + fresh subscription.
• Groww : supports intra-AMC and limited inter-AMC switches via integrated infrastructure.
• Kuvera : supports intra-AMC switches.
• ET Money : supports intra-AMC switches.

AMC-direct switches

The CAMS Online portal and KFinKart portal support intra-AMC switches at the RTA level, available for any folio at the respective AMC.

The Mutual Fund Utility supports both intra-AMC and inter-AMC switches through its eCAN consolidated framework.

Switch settlement timing

For an intra-AMC switch placed before 3:00 pm cut-off :

• Source redemption at same-day NAV.
• Target subscription at same-day NAV (typically).
• Unit allocation on the target side: T+1 to T+2 business days.
• Cash flow is purely internal to the AMC; no bank-account intermediation.

For an inter-AMC switch (operationally a redemption + fresh subscription):

• Source redemption at applicable NAV.
• Source proceeds credited to bank account: T+2 to T+3 business days.
• Target subscription at applicable NAV on the day funds reach the AMC.

The 2-3 day gap means the investor is out of market exposure during this period, with attendant timing risk.

Switch versus STP

A Systematic Transfer Plan (STP) is functionally a series of switches executed on a fixed schedule, typically monthly. Differences from a one-shot switch:

For deploying a large existing corpus into equity, STP is typically preferable to a one-shot switch. For tactical rebalancing or post-event corrections, a one-shot switch is more appropriate.

When to switch and when not to

Reasons to switch

• Plan rationalisation: Moving from regular plan to direct plan for cost savings.
• Underperforming scheme: Switching out of a consistently underperforming scheme to a better-performing peer.
• Asset-allocation rebalancing: Adjusting equity-debt allocation after market moves.
• Tax-loss harvesting: Realising losses to offset gains, then re-entering similar exposure.
• Goal-driven de-risking: Moving from equity to debt as a goal approaches.

Reasons not to switch

• Tax cost: Each switch crystallises capital gains, accelerating tax incidence.
• Exit load: Switches within the load period add direct cost.
• Re-entry NAV: Target subscription at current NAV may be higher than desired.
• Reset of LTCG clock: Target units start a fresh holding-period clock.
• Behavioural risk: Frequent switching often produces worse outcomes than buy-and-hold due to timing errors.

See also

• Mutual funds in India
• STP
• SIP
• SWP
• Direct-to-regular and regular-to-direct switch implications
• Applicable NAV (cut-off rule)
• Mutual fund exit load
• Equity mutual fund taxation in India
• Debt mutual fund taxation (post-2023)
• Section 111A
• Section 112A
• Direct vs regular plan TER differential
• ELSS lock-in
• Mutual Fund Utility

External references

• SEBI
• AMFI India
• Income Tax Department of India

References

1. SEBI (Mutual Funds) Regulations 1996 covering switch and redemption operations.
2. Income Tax Act 1961 sections relevant to switch as redemption-plus-subscription.
3. AMFI Best Practice Guidelines on switch operations.
4. CAMS and KFin Technologies operational documentation on switch transactions.