Connection lost
Server error
A good lawyer knows the law; a great lawyer knows the judge.
✨ Enjoy an ad-free experience with LSD+
Legal Definitions - switching
Definition of switching
Switching, in the context of mutual funds, refers to the practice where an investor sells shares from one mutual fund and uses the proceeds to purchase shares in a different mutual fund, typically within the same family of funds offered by an investment company.
This strategy allows investors to adjust their portfolio's allocation, risk level, or investment focus without fully liquidating their assets from the investment company.
Example 1: Adjusting for Retirement
An investor, nearing retirement, decides to reduce their exposure to market volatility. They sell all their shares in a growth equity mutual fund, which invests primarily in stocks, and immediately use those funds to buy shares in a conservative bond mutual fund offered by the same investment company. This is an example of switching because the investor moved their investment from one type of fund to another to align with their changing risk tolerance as they approach retirement.
Example 2: Capitalizing on Sector Trends
A portfolio manager believes that the healthcare sector is poised for significant growth. To capitalize on this, they sell a portion of their holdings in a broad diversified international mutual fund and then purchase shares in a specialized healthcare sector mutual fund offered by the same fund provider. This action constitutes switching as it involves divesting from one fund to invest in another, targeting a specific industry trend.
Example 3: Optimizing Fund Performance
An investor has been holding shares in "Fund A," but its performance has consistently lagged behind its peers. After reviewing other options within the same fund family, they decide to sell their shares in "Fund A" and buy shares in "Fund B," which has a similar investment objective but a stronger track record and different management team. This is a clear instance of switching, as the investor moved their capital from an underperforming fund to a potentially better-performing alternative within the same investment ecosystem.
Simple Definition
Switching, in the context of mutual funds, describes the practice where an investor sells shares from one fund and then uses those funds to purchase shares in a different mutual fund. This action allows investors to reallocate their investments between various fund options.