What does it mean to exit a mutual fund and switch a fund? Mrin Agarwal explains (2024)

Mrin Agarwal, Founder Director, Finsafe, says “all investors who think that I should do profit booking or who feel that my fund has not done well or who feel that I can exit right now and re-enter, please just remain invested, especially those who have just entered the market a year back. It is just too early for you to exit. And remember, this is how equity markets work. In one year, you will make a great return. Possibly, next year, you may not make a great return and that is why we always say that the average return that you are going to make could be in the range of, let us say, about 10% to 12%. You should remember that this 30-40% is not going to happen year on year. ”

It is very important to revamp and reallocate portfolio when you see a disbalance as far as diversification is concerned. A lot of time investors think of exiting a fund or maybe switching a fund. What does it mean to exit a mutual fund and switch a fund?
Mrin Agarwal: Exiting a fund means that you are exiting the entire holdings from that particular fund and probably putting it into your bank account. The money is going to come into your bank account. But when you switch from one fund to the other fund, it means that you are exiting one particular fund and you are moving the same amount, whatever the redemption amount is, into another fund. So that is the difference.

Looking at the current scenario and looking at the market volatility, all those investors might be seeing a lot of returns coming up from their midcap and smallcap fund. Let us assume they want to switch their mutual fund. First, on what conditions, on what criteria should you be taking a decision of switching a mutual fund and when we talk about switching, it just means within an AMC, do you go from one fund to the other? How can you switch your funds within an AMC and should you be doing it now?
Mrin Agarwal: Certainly you should not be doing it if you have been in the fund for a very short-term period and yes, the scenarios that we are seeing right now is that one, I have made a good return, so should I exit? So, these are the questions that investors want to know, that I have made some good returns on my midcap, smallcap so should I exit?

The second set of investors are saying that, hey, I was holding these set of funds and these set of funds have not made great returns, so should I now exit these and move into funds that have had recent very good performance? And then, of course, people are always worried that should I even remain invested at these points? I mean, I could exit, market is at a high, I could exit and then I can come back later on. But, for all of these categories of people, what I would say is that, first and foremost, it is impossible to time the markets.

When you look at various data that is there and I did share some data from different fund houses, of course, some very interesting data that has been put out on SIP performance and, of course, the proof of the pudding is you are seeing the numbers. So, of course, while we say remain invested for the long term, this data basically shows you that, for example, if you take the 2020 period when due to COVID the markets had fallen by about 35% to 40%, at that point, a lot of people wanted to exit, saying that I am not making any return.

The people who exited, of course exited at a loss, but the people who stayed on made a very healthy return. So, there is another data point that actually shows that, even when you are investing in your SIP, when the markets are at a peak, you are still actually making very good returns and that is because the markets are going to keep going up and down, and you are basically averaging out your costs.

What I would say for all investors who think that I should do profit booking or who feel that my fund has not done well or who feel that I can exit right now and re-enter, please just remain invested, especially those who have just entered the market a year back. It is just too early for you to exit. And remember, this is how equity markets work. In one year, you will make a great return.

Possibly, next year, you may not make a great return and that is why we always say that the average return that you are going to make could be in the range of, let us say, about 10% to 12%. You should remember that this 30-40% is not going to happen year on year. At the same time, if you exit right now, you have a reinvestment risk. Where are you going to invest if you are going to exit your investments right now?

Also, just coming back on the switching part, is switching treated as redeeming your units? Is it taxable? What is the tax implication involved there?
Mrin Agarwal: Certainly, it is equivalent to redeeming the units because you are moving from one fund and you are getting into another fund. Even if you are switching from direct plan to regular plan, it is also treated as a redemption because you are exiting at a particular NAV and you are entering at a different fund. At the end of the day, whatever scheme, direct plan and regular plan are two different schemes. So, it is treated as a redemption and hence there is a tax implication and so, if it is an equity fund, if you are exiting before one year, it is going to be taxed at 15% and if you are exiting after one year, it is going to be taxed at 10% post accumulative gain across your equity investments of Rs 1 lakh.

When you go about it, is it possible for you not to redeem your units and just invest in a different fund instead of switching? Do you really have to switch or you can just stop your investment in a particular fund and then maybe have one more fund in your portfolio?
Mrin Agarwal: Yes, absolutely. You could just decide to pause your SIP or just say that, I just do not want to do any more additional investment through SIP in this fund but you continue holding the investment, of course, and it continues to move as per the NAV, of course. You have that option, and then you could always look at other funds.

I think it is very relevant that we are talking about this because when we look at the NFO data and you are seeing a huge amount of money that is coming into NFOs as well. I see a lot of investors who get very attracted by the NFOs and they think that, okay, let me switch from here and let me get into this NFO because this looks more appealing at this point in time. So, I would just caution people to say that do not do that.

At the end of the day, any data that you see in the long-term always shows you that remaining invested is actually what makes the money and not this moving in and moving out.

When you are investing via SIP, a lot of people do not understand the way SIPs also work. What they do is they just stop their SIP for a year and then they think that the tax implication would be different. How would you like to explain the SIP tax implication because you need to ensure that every SIP of yours at least completes one year? If you are a monthly SIP person, you need to make sure that the timeline is completed, right?
Mrin Agarwal: Yes, absolutely. So, first of all, in the case of mutual funds, it is always first in, first out and so, for example, if you are starting a SIP in January, so from January 23 let us say you started, so it will complete only in January 24. Similarly, February 23 will complete one year or if the exit load is 18 months. So, it is not only about the taxation, you also have to ensure especially if it is an equity fund that you also have to check the exit load before doing a switch or before doing an exit from the investment. And as I said, it is first in first out. So, do keep that aspect in mind as well.