Unit Trust Transfers What You Need To Know About Switching


Investors are often cautioned against transferring their unit trusts or “switching”. What does switching actually mean and how can you be sure that it is the right time to switch?

Switching is the act of selling the units of one unit trust to purchase units in another. It is usually quite easy to switch. You can do it by filling out a form or online, and sometimes there are no associated fees.

This is, however, an investment decision and requires careful thought.


What prompts investors to switch?

One of the main reasons investors switch between funds is to try and improve their returns: The fund originally selected may experience a period poor performance and investors may sense better opportunities elsewhere.

It is often an emotional response to sell a unit trust following a short period of poor performance. Emotional switching can destroy returns. Switching when an investment has lost value often leads to locking in losses.

Switching can lead to improved returns for some investors, but research shows that it is more likely to destroy the value of the returns. Investors, on average, earn lower returns than the funds they are invested in.

A unit trust investment gives one access to the expertise of a skilled manager. The role of the investor is to choose a unit trust, which has investment objectives aligned with their own goals. Staying invested gives an investor the time to benefit from this expertise.

A few investors switch between good funds in an attempt to time the market. Successfully timing the market is extremely difficult since short-term returns are largely random and inherently unpredictable.

Active switching often distracts investors from the task of choosing a good fund for long-term returns.


The costs

Selling units of a fund could lead to capital gains tax (CGT) and the fund switched to may require initial fees.

Some investors may find this short-term cost acceptable, but frequent switching could have a significant negative effect on long-term returns.


When is the right time to switch?

Generally speaking, switching should only be in response to a change in your objectives. If a fund’s performance has sparked some concern, then do some research to verify the quality of the fund or to identify any important changes:

  • A fund’s performance will fluctuate. The best performing unit trusts’ good periods outnumber the bad. Switching during the bad period typically means you miss out on the subsequent good period. However, don’t stick with a fund that continually underperforms. The only way to discern the two is through research.
  • A fund’s performance should be viewed in the context of its objectives: If an equity fund states that volatile returns are expected over the short-term, the loss of value should not raise any undue concern.
  • Are the reasons you originally invested in a fund still valid? Find out if the fund manager has changed? Is the same investment philosophy, which produced the fund’s long-term record, being applied?


Seek out advice

If you are confused or uncertain about your next course of action then try and consult an independent financial advisor. They can help you take appropriate action and give you access to their experience and knowledge.

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