Simplifying Your Dilemma Between Dividend And Growth Plans

Dividend or Growth? If you still struggle in choosing one of these while making mutual fund investments then here’s some help for you. Let’s first understand the basic difference between dividend payout, dividend re-investment and growth options available under mutual fund schemes. 

Dividend payout option

Dividend is simply part of the profit paid out to investors periodically. The net asset value is reduced in line with the dividend declared each time. From tax angle, equity funds enjoy tax-free dividends but the asset management company (AMC) pays dividend distribution tax (DDT) on debt funds before making dividend payouts. That means dividends earned by you on debt funds is after deducting DDT of 28.84%. The option works well for those seeking a regular monthly income and retirees. 

Dividend re-investment

Equivalent units against the dividend declared is bought under dividend reinvestment option. That means investors do not receive any direct payout but dividends are used to buy more units in the scheme. Like dividend payout option, the NAV too falls under this option, however, it more or less functions just like growth option. 

Growth option

Unlike dividend payout, profits earned in a growth plan are reflected in the NAV of the scheme. One of the reasons why capital gains in growth option seem to be higher than those under dividend option. Conceptually, the only difference is that you have already claimed profits under dividend option while the same gets accumulated in growth option. This option suits investors looking to maximize their wealth and are not concerned about periodical payouts. 

After knowing the basic difference between the three options, it’s time to understand which option works best for whom and when. 

When is dividend payout apt?

• If the investible surplus is sizeable and you wish to take advantage of both regular income and capital appreciation throughout the duration of your investment. 
• Investments in theme-based or sectoral funds can be made under dividend payout option as the profits earned under these schemes can quickly reverse after a while once the favourable phase is over. 
• Investors falling in the tax bracket of 30%, who want to invest for less than three years in a debt fund can opt for dividend payout plan as their tax incidence will be marginally less under this plan. 

When is growth plan apt?

• Growth plan works wonders for long-term goals like retirement or child education, where the end objective is to create a corpus and not to spend the scheme’s profits towards less-related activities.  
• The plan also does away with the hassle of reinvesting the dividend amount back into the scheme as all the profits are automatically accumulated.
• Investors with less than three years of investment horizon and falling in the tax bracket of 10% or 20% should invest in growth plan of debt funds as otherwise, they will end up paying DDT of 28.84% under dividend payout option.

Growth plan should be preferred mode when investing in equity funds and equity-oriented balanced schemes except the conditions mentioned above. Since long-term capital gains will not apply to equity funds held for more than a year, therefore, investors can save big on taxes by avoiding DDT under dividend option.  

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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