Alroy Commentary - What is Fund Switching?
In mutual fund investment, “Fund switching” is the process to move money from one mutual fund to another. Investors try to time the ups and downs of the stock and bond markets by purchasing and selling funds in order to earn extra return for their investments.
How can it works? Equity markets always swing between up and down. When investors believe market sentiment is over-optimistic, they can sell the risky assets on hand to avoid potential market downtrends in the future. For example, they sold the high risk assets, such as equity funds, to the low risk assets, such as bond funds or money funds. If equity markets go down after the switching as investors predicted, they sell the bond funds or money funds on hand to equity funds again. They can be benefited from ran away from the market correction or collapse.
Sometimes investors would like to conduct the fund switching if they believe one equity market can outperform another. For example, because of the depreciation of Japanese Yen, investors think the Korea equity market will underperform in relative to the Japan equity market. So they sell the Korea equity fund on hand and buy Japan equity fund. If the equity markets move in the way they predicted, their investments can earn extra return in the switching.
Finally, investors conduct fund switching between fund houses in the same market. For example, there are 3 China funds in the fund platform. China fund from fund house A outperforms the other two because of the outstanding stock picking skill of the fund manager. Investors can sell the existing China fund for the China fund from fund house A. If the China fund from fund house A continues to outperform in the future, their investments can be better-off.
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