Chapter 4 – What are dividend & growth mutual fund scheme and how to choose?
A mutual fund scheme has different options, namely growth & dividend. Dividend option is further divided into two, Dividend Reinvestment & Dividend payout. Let us know more about these different options.
In growth option, any profit made by the fund is reinvested in it. Hence, when the fund gains, the NAV (Net asset Value) goes up and in case of a loss, NAV goes down. The only option to realize the profit in growth option is to redeem or sell your investments.
Dividend Payout Option
In this option the profits made by the fund are paid as dividend to the investor from time to time (monthly, quarterly etc.). When Dividends are declared, the NAV of the fund decreases to the extent of the dividend paid.
Dividend Reinvestment option
In this option when dividend is declared under a scheme, it is not paid as cash to the investor but is used to buy more units of the fund. Hence, then number of units the investor holds increase. However, the NAV goes down to the extent of the dividend.
Which mutual fund scheme option to Choose?
The growth option works similar to its name and provides the compounding effect to the investment. The growth option reinvests the gains over and over again and the returns are compounded, resulting in higher corpus at the time of maturity.
Dividend payout option is suitable for investors who want regular income from their investment.
Dividend reinvestment option is similar to the growth option and the only difference between them is in their taxation.
Dividend Reinvestment or Growth – Equity funds
The dividend in equity funds is tax-free; hence you may choose any scheme from Growth or Dividend-Reinvestment.
However, since reinvested units are allotted on the date of dividend declaration, hence for ELSS (Equity Linked Savings Scheme) funds, the reinvested dividend will get locked in for further three years from the dividend declaration. Hence, dividend reinvestment option in ELSS funds should be avoided.
Dividend Reinvestment or Growth – Debt funds
In debt funds there is difference between Growth and Dividend-Reinvestment as dividend in debt fund is taxed at 28.33% and debt funds are taxed at your tax slab rate (if redeemed before 3 yrs). Hence, if you are in the highest tax slab of 30.9% (including cess), then Dividend Reinvestment option is suitable for you.
However, if you want to invest for more than 3 years, then opt for growth option since Long Term Capital Gain tax is 20% with indexation benefit for debt funds.
यह ब्लॉग हिंदी में पढ़े- Growth vs Dividend option in Hindi
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