Mutual Fund: Growth or Dividend Option?
Written on Thursday, February 11, 2016
By Kumar Pushpraj
While investing in mutual fund, as an investor you have to go through several decision making processes and among these choices the most confusing one is selecting the return options available. Mutual Fund houses offer three options to the investors- Growth, Dividend, and Dividend Reinvested. However, it is not a tedious task as each fund type has its own advantage and disadvantage and the selection totally depends on your needs and circumstances. This blog will introduce you with the three options available and would help you make a better decision.
Growth: If you opt for growth option, the scheme will not pay any dividend but will continue to grow. If the fund buys or sells stocks and makes a gain, the amount is reinvested into the scheme. This gain is captured in the NAV, which rises over time. If your aim is to build long-term wealth, then the growth option would be the right choice.
Dividend: Under this option, you will get paid from the profits made by the fund. Most debt schemes aim to pay a monthly dividend. In the case of equity-oriented schemes, a dividend is declared as and when there is a surplus. An important point to note: dividends in mutual funds are not guaranteed. In the dividend reinvestment option, dividend is not paid to the investor, but is used to buy more units of the same scheme.
Dividend Reinvested: If you select this option, dividend is not paid to you but is used to buy more units of the scheme by the fund house. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.
Tax implication is one important factor which you need to consider while choosing between growth and dividend options. The tax treatment for dividends and capital gains (gains from selling a mutual fund unit at a profit) are different. Dividends from equity mutual funds are completely exempt from tax. Capital gains are taxed based on whether they are realized within a year (short term) or after a period of a year (long term). Dividends from other funds (funds that have less than 65% in equity) are also exempt from tax in the hands of the investor, but subject to a dividend distribution tax as stipulated by the government. This tax has to be paid by the fund directly to the government before dividends are paid to the investor. Capital gains from such funds are subject to tax, depending again on whether they are long term or short term.
Therefore, investors have a matrix of choices, to decide on the option they need. If they need income, they can choose the dividend option. If they need growth they can choose the growth option.
Note: No single mutual fund scheme is impeccable for every investor and that is why there are so many options available in market. While investing in a mutual fund, it is advisable to examine all of the particulars of the fund, so that you don’t end up investing in a fund that doesn't suit your individual requirements.
#Mutual Fund investments are subject to market risk. Read scheme documents carefully before investing.