Fund switching is the process of moving money to different mutual funds that are all part of the same fund group or family. The idea behind this process is to maximize the return generated among the related funds. This approach may even involve selling off all interest in one particular mutual fund and using the proceeds from the sale to invest in a completely different fund. Activity of this type usually occurs either due to an investor's reaction to current market trends, or to changes in the overall investment philosophy and goals of that investor.
There are some benefits associated with fund switching. One of the most obvious is the ability to generate a greater return by reducing the amount of investment in a fund that is performing below par to one that is projected to shortly exhibit an upward trend. Assuming that the projections of upward movement are correct, the investor would stand to significantly increase the value of his portfolio with this type of strategy.
It is not unusual for investors to use fund switching as a means of identifying recently launched mutual funds that exhibit great promise, and securing interests in those funds before they begin to take off. Since the cost of acquiring an interest in the newer fund is likely to be somewhat low, the investor may actually be able to obtain a greater percentage in the new offering with a relatively small amount of money. While this may mean absorbing some degree of loss in the short-term, the increasing rate of return that is experienced once the newly-acquired mutual fund does begin its upward climb positions the investor to enjoy benefits over the long-term that may or may not have been possible with the previous investment.
Along with the potential to increase returns on investments, it is important to consider the costs associated with employing a fund switching strategy. Pulling out of one mutual fund to invest in another can sometimes result in the generation of hefty fees and charges. These fees, sometimes referred to as loads, are sometimes sufficient to offset the potential gains, especially if market trends indicate that the desired mutual fund will enjoy a short spike, then return to a lower value. For this reason, an investor wants to be aware of all the costs of making the switch and weigh those costs against the projected returns. Unless the returns are enough to cover the loads and still provide the investor with a significant amount of profit, the fund switching activity is probably not worth the time and trouble.
