Investing in mutual funds has become so easy and inexpensive that one can consider investing in any number of funds without much additional paperwork. When you invest in mutual funds, you are implicitly investing in stocks, bonds, and other assets with the assistance of competent managers. You pay a small fee to use the services of a fund management firm rather than doing the tasks yourself. Mutual funds are divided into two categories: growth and dividend. There are several misunderstandings about these options among non-professional investors. Some people believe that the growth option is better, and others believe that the dividend option is better. You can choose the option that best fits your investment needs, such as your financial goal and tax situation. The goal is to develop a portfolio that is more diversified than what the average investor would put together on their own. Professional investment managers buy shares for you when you invest in mutual funds.
What is Growth Mutual Fund Option?
The gains from growth mutual funds are re-invested back into the scheme. The NAV reflects your gains in the growth mutual fund (Net Asset Value). If the scheme is profitable, the scheme's NAV rises. Similarly, in the event of a failure, the NAV drops. As an investor in a growth mutual fund, you can only benefit when you redeem or sell your shares. As a result, you will still have the same number of units as you did when you first joined the system. The scheme's NAV fluctuates based on the fund's results.
Assume you purchase 100 units of a Rs 50 NAV equity fund. The scheme's NAV rises to Rs 60 in a year if you choose the growth option. You make a profit of Rs 6,000 by selling the units. As a result, your investment yielded a profit of Rs 1,000. (Rs 6,000-Rs 5,000).
What is Dividend Mutual Funds Option?
The dividend alternative provides you with a steady stream of income. The fund distributes dividends based on the distributable surplus that the plan has amassed. If you own 1,000 shares of a mutual fund and the fund announces a dividend of Rs. 2 per share, you will receive Rs. 2,000 as a "dividend in an equity-based scheme." In other schemes, however, the scheme would be required to pay a Dividend Distribution Tax (DDT), which would reduce the dividend you earn by that amount.
Profits earned by the scheme are not re-invested in the scheme in this option. Instead, profits will be allocated to investors in the form of dividends, which will be paid out monthly, quarterly, half-yearly, or annually.
However, these dividends are only paid out when the scheme makes a profit, and they are subject to the fund manager's discretion.
What is the difference between Growth and Dividend Plans?
The way earnings are allocated to investors is the primary difference between growth and dividend. The returns on both plans are almost identical. Since the growth plan's gains are reinvested, the returns are multiplied. Your gains are used to purchase further fund units of the dividend form, increasing the number of shares held by the investor.
Key difference between Growth and Dividend Plans
|Differences||Dividend MF Option||Growth MF Option|
|Profits||Distributed to investors||Re-invested in the scheme|
|Tax on MF||As per tax slabs||Depends on when you sell or redeem|
|NAV||NAV is reduced as per dividends paid. So NAV will be reduced||NAV will be higher because profits re-invested may earn profits|
|Returns||Due to periodic payouts, total returns would be lower in the long run compared to the growth alternative.||For long investment, total returns would normally be higher than dividend returns.|
Taxation on Growth and Dividend Mutual Funds
When deciding whether to invest in a growth or dividend fund, this is an important factor to remember. If you keep the growth scheme for more than a year, it is considered tax-free. If you hold it for less than a year, you will be subject to a 15% short-term capital gains levy. Dividend payouts to investors are tax-free in the dividend fund alternative. However, the fund levies a Dividend Distribution Tax of 10%. (DDT). In terms of tax incentives, the development strategy is more competitive than dividends.
Dividends from equity mutual funds are subject to a 10% dividend distribution levy. This is a little less than the 15% short-term gains tax that growth mutual funds are subject to holding periods less than 1 year. It is, however, the same as the 10% long-term capital gains tax that growth mutual funds pay.
Dividends from debt mutual funds are subject to a 25 percent dividend distribution levy, plus a surcharge and cess, bringing the overall DDT to nearly 29 percent. This is very similar to the highest income tax slab rate in India, which is 30%.
Whether you want the dividend or growth choice is entirely up to you. When stocks are at all-time highs, the dividend option works better. However, since dividends are not re-invested in the scheme, you can miss out on the compounding of returns. For investors with a long-term investment horizon, the growth choice may be appropriate. It will assist them in building a retirement fund. Furthermore, if you have a steady income and don't need dividends, choose the growth option.