Mutual fund Portability

When you choose to port between asset classes, or options, or funds, you will incur an exit load as well as tax charges. The reason why exit loads are charged by fund houses is to ensure that investors do not switch between funds or fund houses too often. Tax, on the other hand, is charged by the government on the profits accrued at the time of selling units of a mutual fund scheme.

In case you are moving your money between asset classes without redeeming the units of your scheme, you will not be subject to any tax liability. Even moving your money from a scheme that is underperforming to one that is performing well will not attract any tax, whether it is within the same fund house or from one fund house to another. However, if your portfolio contains a multi-cap fund which was supposed to generate profits for your retirement years but is underperforming and you wish to switch to another fund that is performing better, you will be subject to long-term capital gains tax which is charged at 10% of the profit.

Portability works differently for different markets. For instance, no tax is charged under the NPS when up to 2 switches are made between different funds. A nominal fee is charged for the switch, but there is no tax liability. ULIPs, on the other hand, allow customers to switch within the funds made available by an insurance company with no tax implication. You can move from an equity fund to a bond, or from a mid-cap fund to a large-cap fund within the options made available by the same company.

Although portability has not yet streamlined in the mutual fund industry, there are ongoing debates to regularise it. Even if the Securities and Exchange Board of India permits portability in mutual funds, it is expected to be far from a smooth ride.

Challenges that Portability Could Introduce

If you have been investing in mutual funds for a while, you may be well aware that equity mutual funds fare better than other funds in the long term. However, investors tend to chase performance by timing the market in an effort to earn greater profits in a shorter period of time. It is crucial to note that the time period for which you remain in the market counts for more than timing the market.

Various studies show that long-term funds have ups and downs during their tenure. When a fund underperforms, investors are tempted to jump ship and move their investments to another scheme that is performing well. While the second scheme may perform moderately well over the short term, the first scheme could hit rock bottom before picking up and generating much higher returns when compared to the second scheme in a period of, say, 10 years. Investors who are driven by fear and greed would have exited the first scheme and moved their money to the second, only to find that their returns in the long term are not as good as they could have been had they remained invested in the first scheme. This shows how important it is to stay invested in your initial investment.

Portability would make it easy for investors to shift between schemes or fund houses, thereby posing a major concern not only for the investors, but the industry as a whole, particularly when you consider how investors love to chase performance. Portability of mutual fund schemes could also create issues for fund houses. Quick inflows and outflows from schemes could force fund houses to consider short investment horizons which may not generate good returns for the fund, thereby affecting the funds' performance.

According to industry experts, portability must be implemented only when investors garner adequate literacy regarding mutual funds as it will help them comprehend the advantages and disadvantages of their investments, thereby ensuring that the performance of funds and the industry as a whole is not adversely affected due to it.