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Mutual Fund Dividend or Growth Option - Which is better?

mutual-fund-growth-dividend-option

Many mutual fund investors are not yet familiar with two options that each scheme provides - Growth and Dividend. The decision to choose the growth or dividend option is as critical as selecting the best performing mutual fund scheme. 


If you're a new investor, we recommend you to first become familiar with Mutual fund terms - Mutual Fund terminologies you must know as a Investor


What does Dividend and Growth option mean for a mutual fund?

The selection of dividend or growth option depends on investor's requirement for cash flow. These two options cater to different category of investors. One which need constant returns from their investments and other who invest for a long term and want compounding returns. Let's look at this based on specific categories. 


Equity Mutual Funds


Dividend option enables you to receive returns at regular intervals. The dividend amount and the dividend frequency is not pre-defined & depends on the asset management company. Learn about equity mutual fund categories - Equity mutual fund categories for your portfolio. Let's understand this with the below example. 


Let's say you invest into a fund with dividend option at an NAV of Rs.18. The mutual fund decides that as NAV reaches Rs.20, a dividend of Rs. 2 is declared. Now, this Rs.2 needs to be distributed to all the investors of the fund, but no this is not a freebie!!


The NAV is now adjusted and will fall back to Rs.18 (20-2). This is the reason why you would find a dividend option to have lesser NAV in comparison to a growth option. The dividend option is like taking regular profits from your investments!!


Also, what needs to be kept in mind is the taxation component. Starting FY 2018, all dividends from a dividend mutual fund will attract a Dividend Distribution Tax of 10%. No, as an investor you don't need to worry about filing this as part of your return, this will be adjusted in the amount you receive back from the AMC. If you consider the above example, the post tax dividend return would be Rs. 1.8, whereas the NAV value will be adjusted by Rs. 2.


In a Growth Option, you won't get any profits in return until the amount is redeemed, which basically allows the investment to compound & return smarter profits. Hence, the profit will be the difference between the selling price & buying price. 


Learn about taxation on profits of an equity fund - Mutual Fund Taxation in India


Debt Funds


The concept of growth & dividend remains same like equity funds, but dividends in a dividend debt mutual fund attracts a Dividend Distribution Tax of 28.84%, which makes the mathematics of investment a little tricky. 


It is the taxation that makes Dividend option plan of a debt fund relatively costly. If you consider the same scenario as above, when debt fund declares a divided of Rs. 2, the post tax returns would be Rs. 1.42, whereas the NAV would still be adjusted by Rs. 2.
The Growth option here as well offers handsome post-tax returns & allows the magic of compounding to take it's shape. Understand taxation on profits in a debt fund - Mutual Fund Taxation in India.

Which is better - Growth or Dividend?


All investors who have big investments into equity mutual fund scheme & want to take regular profits home, can choose Dividend option. Post tax returns also do not hurt as taxation is only 10% on dividends.


For a Debt Fund, Dividend Distribution Tax makes dividend option expensive & unattractive. The recommendation is to opt for Growth plan in all other investments.



Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com

Still have any questions or feedback on the article, don't forget to share it in the comments section below.




1 comment:

  1. Hi Patron
    I have all my Mutual funds of my family running on Growth, should i opt some thing in dividend as well. please suggest

    ReplyDelete

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