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Should I exit a fund for a downgraded rating in lump sum or SWP?

Ashutosh Gupta explains the best way possible to exit a fund

Ashutosh Gupta explains the best way possible to exit a fund

I want to exit from a fund downgraded from 4 to 3 star and reinvest in a 4 or 5 star fund. Should I exit in lump sum or through SWP?
-Rajdip Singh

First of all, a downgrade from a 4-star to 3-star should not be the sole reason to consider exiting a fund. A 3-star rating does not necessarily signify sustained poor performance. In fact, a lot of 3-star funds continue to be above average performers in their category. So I would suggest first closely evaluating why you are considering exiting the fund.

Now, whether you should switch in lump sum or SWP. Once you have made your mind to move out, there is no compulsion to move out systematically in this case. But having said that, keep the loads and taxes in mind while exiting. A better approach may be to shift in two to three tranches. So on an immediate basis, consider moving out the portion that does not attract any exit loads and where the long-term capital gains tax accumulation is only up to a maximum of Rs 1 lakh. This, so that you can benefit from the long-term capital gains tax exemption limit.

Also, we are on the verge of closing this financial year. So it may be worthwhile to split the redemption in this financial year and the second if you have sizeable gains accumulated in your investments. These are the considerations that you should keep in mind while switching out.

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