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Dividend vs. growth mutual funds: Choosing the right option

You might have seen the words “growth” or “dividend” in the names of mutual funds while researching mutual funds online. These terms refer to two different modes of investment in mutual fund schemes. If you don’t completely understand the distinction between the dividend and growth options of mutual fund investments, read on!

Understanding the dividend and growth options of mutual fund investments:

  • The dividend option is characterised by regular dividend payouts:

Mutual fund houses offer you the option of receiving regular dividend payouts by opting for the dividend option. You can choose for a monthly, quarterly, or annual payout. You can also reinvest your dividends by choosing the dividend reinvestment scheme offered by certain mutual fund houses. Here are some important points about the dividend option that you must know:

  • SEBI (Securities and Exchange Board of India) regulates that fund houses must pay their dividends from the accumulated profits of the scheme.
  • Fund houses cannot assure the regularity or timing of dividend payouts.
  • The NAV (Net Asset Value) of a fund reduces after the fund house transfers a payout to its investors.
  • Dividends earned through equity and debt mutual funds are taxed from investors as per the applicable income tax rates. However, the Income Tax department deducts no TDS (Tax Deducted at the Source) if the aggregate dividend distributed during a financial year to an individual unit holder does not exceed ₹ 5000.
  • The growth option allows investors to reinvest their earnings:

This option reinvests the returns earned through the scheme into the scheme again instead of sending payouts to the customers. The growth option, therefore, allows investors to benefit from the power of compounding and earn interest on interest. Here are some important points about the growth option that you must know:

  • The NAV of growth option funds are higher as compared to dividend funds as the reinvested profits in the fund may grow in value over time.
  • The growth option generally offers higher returns when compared to the dividend option.
  • In the case of equity mutual funds, short-term capital gains (gains earned by holding units for less than a year) are taxed at 15%. Long-term capital gains (gains earned by holding units for more than a year) are exempt from tax up to ₹ 1 lakh and taxed at 10% thereafter.
  • Debt mutual funds are taxed as per the investor’s income tax slab rate in the case of short-term capital gains (gains earned by holding units for less than three years). Long-term capital gains (gains earned by holding units for more than three years) are taxed at 20% after allowing indexation benefits.

To better decide on the option that you must choose, you should define your investment objectives. If you wish to benefit from the power of compounding and can afford a higher NAV, you must opt for the growth option. If you wish to earn regular dividends, you must choose the dividend option of mutual funds. Regardless of the option you choose, you must use an SIP calculator to calculate the returns of your mutual fund investment in advance. Doing so can help you check whether your investments align with your investment objectives.  

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