SIP or lumpsum when switching from one fund to another?

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When you decide to switch funds because your scheme is doing poorly, the dominant question in your mind is this: should I do a SIP or lumpsum switch? Your dilemma takes any of the following forms:

  • What if you reinvest your money at one go, and there’s a correction?
  • Since it’s a new investment in a new fund, shouldn’t you stagger your investments to avoid poor market timing?
  • If you stagger the reinvestment, wouldn’t you be getting an additional rupee cost averaging benefit?

Here are the answers to the SIP or lumpsum worries.

SIP or lumpsum depends on asset class

The asset class matters

The thread connecting the questions around SIP or lumpsum as above is the asset class – both of the fund you are moving out of and the fund you are moving into. The rules you need to follow here are simple, and outlined below.

  • If both the funds are in the same asset class, you can do a lump-sum switch. It does not matter whether the fund is equity, debt, or hybrid.
  • If you are moving from a debt fund to an equity fund/equity-oriented fund, you can do a staggered investment, such as an STP if both funds are from the same AMC or by investing the amount in a liquid fund and running an STP for 6-18 months.
  • If you’re moving from an equity fund to a debt fund/ debt-oriented fund, then it depends on what purpose you’re making such a switch. If it is because you’re nearing the end of your goal, then you can stagger your exit over 6-12 months from the equity fund, and make gradual investments into debt. This is not so much to phase entry into debt, but to maximise opportunities in equity. But if you’re moving from equity to debt simply because of asset allocation needs or you want to lower your portfolio risk, a lump-sum switch will be fine.

Let us make this very clear – we do not prescribe lumpsum investing in equity when you deploy afresh. The above points are applicable only when you switch your existing investments from one fund to another.

Let’s see the reasoning behind these rules on SIP or lumpsum switches now.

Same asset class – no averaging needed

Why do you question if you should invest at one go or through SIP/STP? Because you’re worried about getting the timing wrong and entering at a high. If there’s a correction after this, your investment value will slide and you may be in losses.

You would think that in equity, given the possibility of loss, staggering investments is better than a lumpsum switch. No. When you do a switch you essentially do the following:

  • You move from one equity fund to another equity fund.
  • You still hold the exact same amount you always did– it is just that you are now holding it in a new fund.
  • Your cost of investment in the new fund is not the switched amount but the original amount you invested. You cannot mistime an entry into an equity fund when your old fund is also equity.

An illustration will help make it clearer. Let’s say you started a monthly SIP of Rs 10,000 in January 2010 (beginning of every month) in HDFC Top 100 and continued it until August 2015. The total amount invested would be Rs 680,000. The value of this investment, as of August 2015 worked out to Rs 10.64 lakh.

At this point, you move from HDFC Top 100 to Kotak Standard Multicap. You switch this amount entirely in one go. Markets became slightly volatile over the succeeding months. From August 2015 to March 2016, Kotak Standard Multicap’s NAV dropped from Rs 24.2 to Rs 20.5 before finally climbing back to Rs 24.6 by July (again, beginning of month only).

See the table below. If you take just the Kotak fund, your investment value would have dropped 7.9% by September 2015. Even in February 2016, the Kotak fund’s investment value was lower by 10.9%. You conclude that you’re in losses and that you mistimed your entry into the Kotak fund.

But your investment cost is not Rs 10.6 lakh. The amount you invested in Kotak Standard Multicap is the SIP amount of HDFC Top 100 plus the gains you made in HDFC Top 100. The Rs 10.63 lakh breaks down into Rs 6.8 lakh in cost and Rs 3.8 lakh in gains. Your investment cost is still Rs 6.8 lakh only. In reality, you have not incurred losses at all. The IRR of the Kotak fund alone at end July 2016 is 1.8%. Your investment IRR is actually 15.9%. There is no question of mistiming your entry.

What if you ran SIPs in the Kotak fund instead of lumpsum, to ‘average’ costs and prevent ‘mistiming’? Again, look at it from the angle of fund cost versus your actual cost. Because markets corrected after the switch, a SIP would have averaged the Kotak fund’s investment cost lower. But as you can see from the table above, there is no way you will be averaging costs below your original level. Your gains are substantial. The only way you would be able to average down using SIP/STP will be if you recently invested in an equity fund and the markets corrected very sharply immediately after your switch as it did this year. This is not very likely.

The graph below shows lumpsum switches between four equity funds over the past 10 years. Even with a correction after switching in Feb 2020, your investment is still in profits.

Long story short?

  • When you switch from one equity fund to another, you are holding the same investment. It is only a different fund.
  • If the market falls, whether you hold fund A or fund B or C, all funds will fall. Though your new fund corrects, remember that your old one would have also corrected. Whether in the old fund or the new fund, the value of your investment dropped because of the market. It does not mean that the new fund is generating a loss for you. It does not mean you mistimed your switch.
  • Unless market corrections are very steep and your holding period has been short, switching from one fund to another through STPs/ SIPs will not average costs down.
  • Look at portfolio returns from your original investment date and not scheme level return.

So, what happens if you decide to run SIPs/STP when you switch between funds in the same asset class? You lose out on the following:

  • Instead of deploying the full money (that was already in equity and compounding), you are deploying in tranches. So, you are losing time and suppressing the compounding from ticking like it was earlier.
  • You will have your money sitting in your savings account until fully deployed or have them in liquid fund with STP and paying tax on such switches right through the STP period!

Time for a caveat about switching within asset class – this is in debt funds. This caveat applies when you are moving from a short duration fund to a long duration fund, say a gilt fund. In such cases, there is a risk that you may be deploying the money at the lowest interest rate point. That means you will get into losses immediately if rates move up while the same would have been avoided in the short duration fund you earlier held. This is fine, provided you wait for 3-5 years to make returns as gilt funds need that kind of time frame. If not, you would actually reduce your near-term returns due to ill-timing the interest rate cycle.

So, the rule of lumpsum switch will readily apply if you are switching within the same duration range- short to short or long to another long fund. If you decide to do lumpsum from a short to long duration fund, be prepared to take short-term pain (which may still be lower than in equity) or use the SIP mode. But do know that the benefits of SIP will not be high in debt as it is with equity.

Changing asset classes

The SIP vs lump sum question comes more into focus when your funds are in different asset classes. Moving between asset classes begets a variety of combinations – but at a broad level it simply boils down to switching into debt/ debt-oriented hybrids or switching into equity and equity-oriented hybrids, from any other category. When you switch between asset classes, you need to be careful in some cases.

Switching into debt/debt-oriented funds: In debt, the possibility of wrong timing is slim in accrual-based funds, given that the nature of these funds is to be less volatile. Whether you make a one-time switch into these funds or spread it out over a period does not make a material difference to your investment cost. In duration funds, as discussed earlier, there are chances you may enter at a time when the interest rate has bottomed.

So if you are switching into a short duration or accrual based fund, a lumpsum switch is fine. If you are switching to long duration funds, unless you understand the rate cycle, ensure you give it the 3-5 year time frame it needs to tide over rate cycles. Do remember, though, that if you are moving closer to your goal and therefore wish to switch from equity to debt, it is not the time to be taking duration calls. Simply do lumpsum switches to safe short duration funds. 

Switching into low-risk, low-volatile hybrid equity categories:  If you switch into equity savings, balanced advantage, and arbitrage – you can do it in a lump sum. Like with debt funds, the low volatility in these categories reduces market timing errors. At worst, balanced advantage funds could be a bit volatile in severe corrections like we saw this year. But this is not common, and they can recover faster than pure equity.

Switching from debt to pure equity fund or aggressive equity hybrid fund: You need to spread out your investments when you are moving from debt to a pure equity or aggressive equity hybrid fund. If your debt and equity fund belong to the same AMC, you can simply set up an STP for 6-18 months, depending on the amount you are moving.

Else, phase out the redemption from the debt fund so that you invest in the equity fund over a period of 6-18 months.  This long leeway we give is again based on market conditions. If you start a SIP in a massive market rally, a longer period of STP is better to tide over a correction (which may happen immediately or later).

So, the next time you need to switch funds , stop worrying over SIP or lumpsum. Simply consider the asset class of the funds. Don’t sweat moving within the same asset class. Spread investments out if you are moving from debt or gold into pure equity funds. It’s that simple!

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32 thoughts on “SIP or lumpsum when switching from one fund to another?”

  1. Hey Bhavana,
    My FinPlanner asked me to move down to 5 equity funds from the 20 odd I had. Tho the returns were in 14-22% range I can see the obvious value of fewer funds.
    However I was in doubt about lump-sum/sip. The FinPlanner said it’s within the same class of funds so it doesn’t matter. Your article and your replies to comments have been quite educational and provided much needed clarity. I will be redeeming at current market highs (sensex > 53k). Guess I can invest a part and sit for a few weeks until a minor correction materialises (5% +) and then go all in?

    1. Bhavana Acharya

      A minor correction won’t help bring your costs down by much :-). As mentioned in the article, you’d need a steep correction and you needed to have invested somewhat recently in the funds if you are to lower your investment costs when switching between equity funds. If you’ve been in these funds for a good while and built up returns, small corrections won’t help pull down overall costs. – thanks, Bhavana

  2. Hi, recently I took the money out of the underperforming fund on 6th Nov when Nifty was at 12260. And the money got credited today where Nifty is at 12750. There is a huge difference of 490 points (4% ) here. So still is it advisable to invest entire sum if I am switching within same asset class equity? Considering the market scenario wouldn’t it be prudent to either wait for correction or start STP for 6months?

    1. Hello Ma’am,

      The point we’re making in switching is that it is your original investment cost that matters. You are not making a fresh investment in the new fund. It is the same investment, you are just holding the money in B fund now instead of A fund. You are not investing at 12750. Unless the correction is steep enough to bring your cost below the amount you put in fund A, there is no benefit in STP or waiting. There is no timing issue here. Timing comes only when you are deploying fresh money or moving from one asset class to another.

      Thanks,
      Bhavana

  3. Can you please also add some points related to Tax treatment for this?
    When we try to switch lumpsum in the same asset class but different AMC, we might incur taxes when withdrawing the amount right?

    1. Hello sir,

      You will always have to pay tax when you switch from one fund to another. Per taxation rules, if you pull out of a fund, it counts as redemption. It does not matter whether or not you reinvest the sum nor where you are reinvesting. Moving from dividend to growth of the same fund also counts as redemption for tax purpose.

      Thanks,
      Bhavana

  4. The rationale of switching lump sum basis within the same asset class i.e equity to equity is now clear to me , thanks to your clear rationale in the article. But what i am still not clear about is , what about switching in the same asset class i.e. equity to equity but where the nature of equity fund could be different. So, is it still advisable to switch over lump sum basis from say a large cap to a mid cap fund or small cap ? One more point, if my asset allocation needs requires me to increase my allocation more towards equity , should i re balance towards equity , in an incremental manner using SIP or STP or do it straightaway ?

    1. Hello sir,

      When moving between large/mid/small – the same logic will apply. You still need to look only at your original investment cost. If markets/segment you are moving into is correcting steeply and using a SIP will average your costs below the original investment cost, then you can stagger. Else, lump-sum will still work. Don’t look at returns from the fund’s cost – look at it from your cost. If you’re increasing equity allocation, then it would either be fresh investment (deploying additional money) or shifting from debt to equity. In both cases, it should be staggered.

      Thanks,
      Bhavana

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