Wednesday, November 7

Mutual Funds - Growth vs Dividend Option

Growth vs Dividend Option in a Mutual Fund
When we select the fund for investing, often, the funds offer you the option of Growth Plan or the Dividend Option. It is important to understand the difference between the two and to select the option best suiting the needs and taxability aspects for an individual.

Regular Income: The dividend option helps you get regular income (for example, for senior citizens). The growth option does not help you get regular income.
Building Wealth: Since the dividend option gets you money at regular intervals, you cannot get the benefit of compounding. It is not suitable for building wealth. The growth option, instead, helps you build wealth over time and income gets compounded. Growth option is suitable for people wanting to save for future (example, child’s marriage, higher education etc)
Tax Treatment: While dividends from equity oriented funds are tax free, if the fund is a non-equity fund, there is a Dividend Distribution Tax (DDT) applicable which will have to be borne by the investor.
 
If the equity funds are held for less than a year, you have to pay 15% capital gains tax. No capital gains tax is applicable if you hold an equity fund for more than a year. So growth fund is more beneficial here.
 
If Debt Funds are held for less than a year, short term capital gains are applicable and thus, your tax rate slab is important. If someone is in 10% slab rate, Growth Option is better since the DDT is higher at 12.5% (25% for liquid funds). If someone is in higher tax slab, Dividend option is better.
 
If Debt Funds are held for more than a year, Growth Option is better since the Capital Gains (10%; 20% after indexation) would be lower than the DDT of 12.5%. Similarly, even the liquid fund investors should go for Growth plan.
Source: Economic Times - Wealth

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