Mutual fund offers growth plan and dividend plan option for
the same funds. The portfolio in which the fund invests is the same and the
only difference is the treatment of gains.
In a growth option investors do not get payout in the form
of dividend, instead this amount is reinvested in your fund. This increases the
NAV of the fund. As there is reinvestment, the returns get compounded overtime
and increase you returns in long term.
The dividend option on the other hand gives payout to
investors in the form of dividend. The dividend is credited to the investor’s
bank account. As the amount is not reinvested, the investors do not get the
benefit of compounding. This dividend gets deducted from the NAV of your fund.
Which one you should
opt?
If you have a regular income and are not dependent on the
income from investment, you should choose the growth option. Due to the benefit
of compounding the, your accumulated funds will be higher and you will get
better returns in long term.
If you do not have regular income or you are a senior
citizen/ retiree and are depended on income from investments, you can opt for
dividend option. However, you should keep in mind that the dividends are not
assured. You will get dividend only if the scheme makes profit and if the fund
manager declares it. The chances of dividend are high when the market is high.
Tax implications
Tax is an important aspect to consider before deciding any
investment plan. Short term gains (holding period less than one year) in equity
growth plan are taxed 15%. Similarly, long term gains are taxed at 10% only if
the gains are above Rs.1 lakh. Long term capital gains are not likely to cross
Rs.1 lakh for small and medium-sized investors.
For dividend option, the dividend that the fund pays is tax
free at the hand of investors. The amount however, is distributed after
deducting dividend distribution tax (DDT) at 10%.
In case of debt mutual fund with growth option, short term
capital gains (holding period less than three years) are taxed according to the
tax slab you belong to. Long term capital gains on debt fund are taxed at 20%
after indexation.
For debt fund with dividend option, the DDT is 25%,
excluding surcharge and cess.
Hence, it is seen that growth option is more efficient in
terms of tax for long term.
