The Switch: Two Legs, One Instruction, Two Schemes

One instruction, two separate dealings. A switch strikes a redemption in the scheme being left and a fresh purchase in the scheme being joined, and each leg takes the value per unit of the scheme it belongs to. A redemption is exactly what has occurred, so any load the departing scheme's terms impose still bites. The word switch hides the count, and the count is two.

Start with the work the word is doing. A switchA single instruction under which units in one holding are struck out and units elsewhere are struck in, with no cash passing through anybody's hands. arrives as one line on a form and comes back as one line on a confirmation, so it reads like one event. Underneath that single line, two dealings are recorded, in two different schemes, on two different sets of terms, and each of them is priced separately. The count is two, and every other correction below is a consequence of holding on to that count.

One asset manager and two of its schemes carry the whole of the arithmetic that follows. Girnar Asset Management Limited runs the Girnar Large Cap Equity Fund, an open ended equity scheme, and the Girnar Broad Market Index Fund, a tracker of a broad index. The equity scheme reports net assets of Rs 4,200 crore against 120.00 crore units outstanding, and dividing the first by the second gives a value of Rs 35.00 for one unit exactly. Sohail Merchant heads operations and Kalyani Bhagat manages the equity scheme. The index scheme carries an annual expense ratioA scheme's yearly running charge, quoted as a percentage of its net assets and taken from the scheme rather than billed to the holder. of 0.20 per cent of net assets against the equity scheme's 1.65 per cent of net assets, and that is the only figure the two schemes share.

Two things arrive already settled and are used rather than rebuilt. A subscription of Rs 1,00,000/- into the equity scheme bought 2,857.143 units, and those are the units cancelled here. How an order turns into an allotted balance is covered separately, so two dealings can be said to attach separately without arguing from the beginning about why attachment exists. A unit, the striking of a value per unit out of a scheme's own books, and the working of a cut-off line are all settled under those subjects.

What exactly is a switch, and how many dealings is it?

Picture a household that has kept its savings in a recurring deposit at one bank and decides to move the money to a deposit at another. Whatever the counter clerk calls the form, two things have to happen. The first deposit is closed and paid out, and a second deposit is opened with the money that came out of it. One trip to the branch, one signature, two separate closures and openings in two separate sets of books. Nobody would look at that and say the first deposit survived the journey. A switch between two schemes has exactly this shape, and the only reason it does not feel like it is that the holder never touches the money in between.

So the plain statement is this. One instruction goes in. On the strength of it, units held in the scheme being left are cancelled, and units in the scheme being joined are created. The two events are each written into a separate scheme's records. Each is priced by a separate scheme's figure. Each half of the pair is called a legOne of the two dealings a switch is built out of, either the cancellation in the scheme being left or the creation in the scheme being joined., and the word is worth keeping because it stops the whole thing being thought of as one object. A pair of legs is not one leg that moved.

How Mutual Fund Purchases, Redemptions and Switches Work: which part is which?

Three named parts, in the order that makes the third one obvious. Take them one at a time. A switch is not a third kind of dealing sitting alongside the other two. A switch is one of each, joined.

A purchase

On a purchaseMoney arriving at a scheme, with fresh units struck in exchange at whatever value per unit attaches to the application., money arrives at the scheme and fresh units are struck in exchange. The count of units in issue goes up. The net assets go up by the money that came in. Because the two rise together in the same proportion the scheme was already carrying, the value of one unit is left exactly where it was, and no holder who was already in the scheme is any better or worse off for the arrival of a new one. The purchase mechanism is worked in full under subscription and allotment, and only as much of it as the second leg of a switch needs is restated below.

A redemption

A redemptionUnits struck out of a scheme, with money leaving it in exchange, whether that money goes to a bank or straight into a second scheme. is the same event run backwards. Units are cancelled. Money leaves. The units outstanding go down and the net assets go down by the money that went out. Nothing happens to the value of one unit here, for precisely the reason nothing happened to it on a purchase: what goes out is money and units in the very ratio at which they would have come in. Notice the limit of that definition. Nowhere does it require the money to reach a bank account. Money leaving the scheme is the whole of the requirement, and where it goes next is a separate question.

A switch

A switch is one of each, struck under a single instruction. The cancellation happens in the scheme being left. The creation happens in the scheme being joined. The rupees released by the first are applied to the second, without stopping anywhere the holder can see or touch. The internal route the cash takes, instead of a bank route, is the whole source of the feeling that a single thing occurred. Two things occurred, and both were written down.

Why does the cash never reaching a bank account change nothing underneath?

Because the route the money takes and the record the scheme keeps are two different subjects. The registrar and transfer agent writes a cancellation into the first scheme's records and a creation into the second scheme's records, and neither of those entries asks where the rupees travelled on the way. A holder who never sees a credit in their account has learned something true about plumbing and nothing at all about accounting.

Think of a household that pays a shop by transferring money from a savings account, and compare it with the same household paying from a wallet balance that the shop's app tops up internally. The second version feels lighter. No bank message arrives, no balance visibly drops, and the whole thing takes one tap. The money still left, the shop still received it, and both sides still wrote it down. The absence of a visible cash movement is a fact about convenience, and people keep reading it as a fact about substance.

A great deal rides on the cancellation being real. Units really were destroyed in the scheme being left, so whatever attaches to a cancellation attaches here too. If the scheme's own terms charge for a cancellation, they charge. If a cancellation is a disposal for tax purposes, it is one, and that is dealt with under its own authority below. Reading the invisible cash route as an absence of a redemption is the single most expensive misreading available on this subject.

Two schemes means two values per unit, so which figure prices which leg?

Each leg is priced by the scheme it happens in, and there is no third figure anywhere that prices the switch as a whole. The cancellation in the Girnar Large Cap Equity Fund is priced at that scheme's value per unit. On this record that is Rs 4,200 crore of net assets divided by 120.00 crore units outstanding, or Rs 35.00 for one unit. The creation in the Girnar Broad Market Index Fund is priced at the index scheme's own value per unit, a completely separate figure struck from a completely separate set of holdings on a completely separate divisor of units.

The number of units received has no arithmetic relationship whatever to the number of units given up. The instinct runs the other way, so the claim is worth sitting with. People expect the counts to be near each other, or to differ by something small and explainable, and there is no reason at all for that to be true. Two schemes, two pools, two divisors. A household that sells forty kilos of one grain and buys another grain with the proceeds knows the two grains carry different prices per kilo, so it does not expect forty kilos back. Units behave the same way and the instinct fails only because a unit sounds like a standard object.

Money, and only money, carries across from one leg to the other. The cancellation produces a figure in rupees. The rupee figure, less anything deducted before it moves, is what the second scheme receives and divides by its own value per unit. So the rupees are the bridge and the unit counts are the two banks of the river.

Can the two legs land on different days' values?

In outline, yes, and this is the part readers most often get wrong. A switch lands in two schemes rather than one. An application has to reach the scheme being left and be acted on there, and money has to reach the scheme being joined and be acted on there, and each of those events is governed by the terms of the scheme it happens in. The two legs are not obliged to be struck on the same day, and a holder who assumes they must be has assumed the one thing a switch does not promise.

For the holder, rather than for the paperwork, the consequence is this. If a gap opens between the two legs, then for the length of that gap the holder has left the first scheme and has not yet been given units in the second. The holder is not in both. The holder is not in either. Their units in the first scheme no longer exist, so whatever the second scheme's value per unit does in the meantime is done without them, and whatever the first scheme's value per unit does is done without them too. The length of that gap follows from conditions set by the Securities and Exchange Board of India (SEBI).

Every one of those conditions belongs to SEBI. Which day's struck value attaches to an application, what counts as the application reaching the scheme, what counts as the money reaching it, and how those tests differ between the departing leg and the receiving leg are all set by SEBI and published at sebi.gov.in. Those conditions are revised, so the position that governs is the one published there on the day it is needed.

Does an exit load bite when a holder switches?

If the departing scheme's own terms apply one to the units being cancelled, then yes, and it applies in exactly the way it would if the money were going to a bank account. There is no separate event, so there is no separate treatment for a switch. An exit loadA charge levied by a scheme on units struck out inside a stretch of time its own terms set, taken from what the cancellation releases. is charged on a redemption, a redemption is what leg one is, and the destination of the rupees afterwards has nothing to do with it.

Now the stamp, before any arithmetic. Nowhere in this platform's record is a rate or a stretch of time set for the invented equity scheme's exit load, so every load figure below is an assumption made to render arithmetic visible, never a rule, a ceiling or a practice of the business. The rate used from here on is an assumed 1.00 per cent. No period is assumed. Whether there is any ceiling on what a scheme may charge on a redemption, and what conditions attach to it, is SEBI's material at sebi.gov.in.

What does the worked switch look like, run leg by leg?

Two legs, worked separately. Two dealings show rather than one blur. Every division is shown rather than quoted. The leg being left comes first.

The half paisa is not a slip and it is not noise. Rs 1,00,000/- divided by Rs 35.00 is twenty thousand sevenths, or 2,857.142857 and so on without ever stopping. Rounding that to three decimals gives 2,857.143, an upward rounding of one seven thousandth of a unit. Multiplying the rounded figure back by Rs 35.00 gives Rs 1,00,000.005, five paise divided by ten above a hundred thousand rupees. In paise it is two crore, one paisa and a half, and half a paisa sits exactly midway between two whole paise. A figure that lands exactly halfway cannot be stated to the paisa at all without silently picking a rounding rule, and quietly picking one hides a decision inside a result. The exact figure is printed and the residue named.

The load, and the two bases it can be quoted against

Now the assumed load. Take the load exactly first, then say what it is as money. The two are not the same statement.

Read those last two rows together. Readers slip at this step, and they slip in a way that costs them an argument rather than money. The identical Rs 1,000.00 is one hundredth of one base and one ninety ninth of the other. Against the redemption value it is the assumed 1.00 per cent, give or take the five hundred thousandths of a rupee that rounding the load to the paisa dropped. Against the rupees that actually moved on, it is one over ninety nine, or 1.010101 recurring per cent. Two figures, two bases, one deduction, and both statements are exactly true of the same rupees. Say the base out loud in the same breath as the percentage or the percentage is not yet a number.

Leg two, and where the arithmetic stops

The receiving leg is a single division: Rs 99,000.00 divided by the Girnar Broad Market Index Fund's own value per unit. Nowhere in this platform's record is a value per unit set for that scheme. The record carries a year and a running charge for that scheme, and carries neither net assets nor a count of units in issue, so there is no divisor at all. So the division is not completed here, and the answer is recorded as non computableA number nowhere set in this platform's record, named openly and left blank instead of being filled with something that merely looks right. rather than filled in.

The shape of the answer can still be shown, and for that a second assumption is needed and stamped. Assume purely for arithmetic that the index scheme also struck Rs 35.00 for one of its units, a figure borrowed off the equity scheme because this record holds nothing else worth borrowing. Then Rs 99,000.00 divided by Rs 35.00 is nineteen thousand eight hundred sevenths, or 2,828.571428 and so on. To three decimals that is 2,828.571, a rounding downward this time.

The gap comes back at the assumed 1.00 per cent plus two hundred thousandths of a percentage point of rounding. The neatness holds only because the two values per unit were assumed equal, and the moment they differ the gap stops meaning anything at all. If the index scheme's value per unit were half the equity scheme's, the switch would create roughly twice as many units and the gap would be a large positive number that had nothing to do with the load. If it were double, roughly half as many, and the gap would swallow the load entirely. The load is a rupee deduction. The deduction becomes a unit comparison only under an assumption that this record does not support.

Two legs, two roundings, and where each one went

A switch rounds twice, once on each leg, and the two roundings go in opposite directions and are not the same size. A reader who reconciles a statement to the paisa and finds a residue should know which of the two produced it, so both are worth printing.

Half a paisa up on one leg and one and a half paise down on the other. The two residues do not cancel, nothing in the arithmetic makes them cancel, and on any pair of figures where they happened to cancel that would be a coincidence of the numbers rather than a rule anybody wrote. The sizes are unrelated because they come from two independent divisions, each rounded at the third decimal of a different quotient. The habit worth taking away is smaller than the arithmetic: when a reconciliation is out by a fraction of a paisa, a unit rounding is the first thing to look for, ahead of an error.

One check that cannot fail, and one that can

One check is tempting to run and is worthless. Take the 2,828.571 units created, multiply them back by the same assumed Rs 35.00, and the Rs 99,000.00 that went in very nearly reappears. The units were produced by dividing that figure by that value, so multiplying them back cannot show anything the division did not already contain. All it tests is the rounding, the one and a half paise already printed above. A check whose inputs are the outputs of the thing being checked is not a check, and running it produces a feeling of confirmation with no information behind it.

Here is one that can actually fail. Take the two unit counts and the assumed load, and use them to recover the ratio between the two schemes' values per unit. None of those three figures was derived from that ratio. Divide 2,857.143 by 2,828.571 and multiply by ninety nine hundredths. The two values per unit were assumed equal, so sound arithmetic brings that back at one. The ratio comes back at 1.0000002. On a first value per unit of Rs 35.00, that implies a second of about Rs 35.0000071. The two ten millionths of discrepancy is exactly the rounding already declared: one and a half paise on Rs 99,000.00 is 1.5151515 ten millionths, and the Rs 0.00495 dropped between the legs is another 0.5 ten millionths, and those sum to 2.0151515 against the implied 2.0151518. The route uses figures from both legs and from the load, so a mistake in any one of the three would show up in it. Independence from the inputs is what makes it a check.

Two readings are worth taking. At the lowest setting the control offers, an assumed Rs 10.00 a unit, the same Rs 99,000.00 creates 9,900.000 units, more than three times the count that was cancelled. At the highest, an assumed Rs 100.00 a unit, it creates 990.000 units, roughly a third of that count. The rupees did not move by one paisa across that whole sweep, and the unit count moved by a factor of ten. The claim that the two counts are unrelated has no more content than that. Somewhere below the default the created bar passes the cancelled bar, at an assumed value of about Rs 34.65 a unit. Rs 99,000.00 divided by 2,857.143 gives that figure, and the control's grid does not actually land on it.

What does moving without exiting actually mean, and what does it not mean?

The phrase means two things, and only two. The holder remains within a single asset manager's set of schemes instead of departing for a different manager. And the cash takes an internal route from one scheme to the other, so the holder never handles it. Both of those are true, both are worth something operationally, and together they are the whole of what the phrase describes.

The list of things the phrase does not mean is longer, and every item on it is a place where holders lose money or lose an argument. The units were cancelled and different units were made, so the units did not survive. A cancellation is a realisation whatever the money did next, so something was realised. The departing scheme's own load terms bite on a cancellation and do not ask where the rupees went, so a charge can apply. And the two legs need not be struck together, so the holder need not have been continuously invested. The phrase is an honest description of the holder's experience and a poor description of the scheme's accounting, and almost every error on this subject lives in the gap between those two.

Why can the units created in the second scheme not be worked out?

Because the input is not here, and the honest thing to do with a missing input is to name it. The record gives the Girnar Broad Market Index Fund a stated year and an expense ratio of 0.20 per cent of net assets. There are no net assets, no units outstanding and therefore no value per unit. The receiving leg is one division and its divisor is absent, so the answer stays open.

The alternative is inventing a plausible figure, and a plausible figure is exactly the kind of wrong number that survives a reading and gets quoted later. Naming the absent input belongs to the answer instead of being a gap in it. A reader who is told the units created cannot be worked out here now knows something precise: that they need one figure, that they know which figure it is, and that they can go and find it on the scheme's own published value. A reader given an invented divisor knows nothing and believes something.

And the direction of the answer is not lost along with the figure. The rupees are fixed. A division by a smaller divisor gives a larger result and a division by a larger divisor gives a smaller one, so a smaller value per unit yields more units and a bigger one yields fewer. The direction is certain, needs no data at all, and is worth more to a reader than a fabricated count would be. The control above shows how wide that range is while the rupees sit still.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.