The cost of switching funds

A friend runs the same play every March. He sells whatever fund lagged last year and buys whatever sits at the top of the one year chart. It feels like good housekeeping. Prune the laggard, back the winner.

I asked him one question. What does the move itself cost, before the new fund has done anything at all.

He had never counted it. So we did.

Say the pot is 11.5 lakh, up from 10 lakh over the year. Redeem inside twelve months and two bills come off on the way out. Capital gains on the 1.5 lakh gain, at 20 percent, is 30,000. The exit load many equity funds charge inside a year, about 1 percent, is another 11,500. That is 41,500 gone. Roughly 3.6 percent of the pot, handed over before the new fund earns a single rupee.

Here is the part that flips the whole thing. Hold the same fund past twelve months and the rate drops to 12.5 percent, and the first 1.25 lakh of gains each year is exempt. The same gain now costs about 3125, and the load has disappeared. The tax code quietly punishes the hop and pays for the hold.

Which resets the question. The new fund cannot be a little better. It has to out-earn the old one by more than the 3.6 percent it just cost you to move, and then keep out-earning it. A one or two point edge does not clear the toll.

The detail most people miss. Inside a fund, the manager's own buying and selling costs you no tax at all. The only trade that ever sends you a bill is the one where you decide to jump. Chasing last year's winner is you volunteering to pay it.

Staying put is not laziness. It is the one free deferral the code hands a fund investor. Make the new fund earn the toll before you pay it.

The toll, on your own numbers

The friend's March habit costs Rs 41,500 on an Rs 11.5 lakh pot. Change the inputs below to your own holding. The months box decides which side of the 12 month line you are on, and that one number changes almost everything.

Set the months to 13 and the toll falls to Rs 3,125, about 0.27 percent. The fund, the gain and the market are the same. Only the calendar moved.

Spreading the toll over the years

The opening says the new fund has to out earn the old one by more than 3.6 percent. Over how long? The longer you plan to hold the new fund, the smaller the yearly edge it needs, but the edge has to show up every year.

Now put that next to what you know about last year's winner. A fund at the top of the one year chart is there because of one year. The star rating post shows how rarely last year's leader leads again. Asking it to beat the old fund by 1.85 points a year for two years straight is asking a lot of a one year record.

The calendar of an equity fund unit

The rules that decide the toll are all dates. Here they are on one line, for a unit bought on 15 Mar 2025.

1. 15 Mar 2025Bought

   The 12 month clock starts for these units. Each SIP instalment has its own clock.

2. Before 16 Mar 2026Short term zone

   Gain taxed at 20 percent. An exit load, often 1 percent, may apply.

3. 16 Mar 2026 onwardLong term zone

   Held more than 12 months: 12.5 percent above Rs 1.25 lakh of long term gains in the year.

4. 1 Apr 2026New financial year

   A fresh Rs 1.25 lakh of exempt long term gains.

Two details trip people up. First, a SIP is not one holding. Every monthly instalment has its own purchase date, so selling a whole SIP fund at once can mix units that are long term with units that are a few weeks old. Units are redeemed first in, first out, so the oldest go first. Second, the yearly exemption covers all your long term gains from listed equity and equity funds together, not each fund separately.

Where the exit load goes

The exit load is not a fee to the fund house. Under SEBI's 2012 rules it is credited back to the scheme, so it compensates the investors who stay for the cost of your leaving. SEBI also used to allow schemes with exit loads to charge an extra 0.05 percent a year in expenses; its board removed that allowance on 17 Dec 2025.

The free Learn module on equity taxation after July 2024 covers holding periods, the exemption and worked sale examples, with a quiz. The capital gains tax calculator runs any redemption. Related: the base rate of beating the market.