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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investor Services

An investor switches from the equity scheme A to the debt scheme B of the same fund house through a switch request. For the purpose of the transaction, which treatment is correct?

A switch is treated as a redemption from the source scheme followed by a purchase in the target scheme at their respective applicable NAVs. Because of the redemption leg, exit load and capital gains tax may apply on the source scheme.

  1. AIt is treated only as a transfer of folio with no redemption or purchase
  2. BIt is treated as a redemption from scheme A followed by a purchase in scheme BCorrect
  3. CIt is treated as a purchase in scheme B only, with scheme A units remaining unaffected
  4. DIt is treated as a dividend reinvestment in scheme B

Explanation

A switch is a redemption at the applicable NAV of the source scheme and a fresh purchase in the target scheme at its applicable NAV. Hence exit load and capital gains tax implications can arise on the source scheme units. It is not a folio transfer or a dividend reinvestment.

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