Dividend and Growth options in Mutual Funds?

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Should I go for 
dividend or growth option in a mutual fund scheme? It is an eternal question that haunts new mutual fund investors. Every now and then it keeps popping up in various mutual fund forums. Are you still confused about these two options?
Actually it is not a very difficult option. Simply put, your investment objective decides the option you need to pick while investing. If you are looking for regular income, you should go for dividend option. If your investment objective is to create wealth over a long period, you should invest under the growth option.
Dividend option
"Whatever profit is earned by the mutual fund scheme is paid out on a periodic basis in the form of dividend," says Jaya K Nagarmat, Managing Director, Investor Shoppe Consultancy. This option is recommended to retires or to investors looking for regular income from their investments. The Net Asset Value of the scheme will go down in tandem with the dividend declared, as the profits are paid to investors. It is exactly like taking your profits from your investments.
"It doesn't make sense to go for a dividend plan, if the amount invested is too small, say, Rs 5,000-10,000. The amount of dividend you receive will be negligible," says Rajesh Jogdand, a Certified Financial Planner (CFP). The investible amount should be sizeable enough to get noticeable income from your investments.
Growth Option
"It is simply a cumulative option. You don't receive any payouts. Whenever you need the money, you should withdraw the entire or part of your investment," says Nagarmat. The profits are not paid out in between, rather they keep on accumulating in the scheme, it will be reflected in the NAV. The NAV appreciates in tandem with profits. This option is usually recommended if you are looking to create a corpus for a long-term goal. So, if you want to create a retirement corpus, you should opt for the growth option.
Dividend re-investment option
"It works quite similar to the growth option. The only difference is whenever the dividend is declared, fresh units of the same scheme are purchased and they are added to your folio," says Jogdand. It increases the number of the units you hold for the same cost price. "It is recommended if you have a strong belief that NAV of the scheme will get a significant rise in future," adds Jogdand.
Dividend Distribution Tax
If you are opting for the dividend option, you should also pay attention to Dividend Distribution Tax (DDT) paid by mutual fundswhen they declare dividends. Investors need not pay any tax on dividends received from mutual funds. But mutual funds have to pay DDT on dividends declared in a debt scheme. If you have invested in a debt scheme, the fund house will deduct DDT of 28.84 per cent on dividends declared. In that sense, the dividends are already taxed.
"If the investor is in the low tax bracket (10 or 20 per cent), the growth option would be more beneficial in a debt scheme," says Jogdand. It won't make much of a difference if you are in the higher slab, adds Rajesh.
Can you switch?
Surely, you can. But, it will be regarded as selling of old units and buying new one. This will attract exit load and capital gains tax. So, check if exit loads are applicable on your sale. If investments in debt mutual funds are sold before three years, gains are taxed as short-term capital gains and taxed as per the income tax slab applicable to the investor. 

Source : Economic Times 

1 comment :

  1. well written, love to see some nice posts on mutual funds. Please make a post on SBI MAGNUM/MIDCAP