7/29/2019 Facts to Be Considered While Choosing Growth or Dividend Option

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Facts to Be Considered While Choosing Growth or Dividend Option 

If you are new to mutual funds, it could be difficult for you to make a choice of right schemewithout an expert's advice. Once you select a fund to invest in, you could again be in

dilemma, so as to choose from growth or dividend payout /dividend reinvestment option.

Before choosing any of these options, it is imperative to understand the underlying

implications on your investments. Hence, let's understand the purpose and effect of yourdecision to choose growth or dividend while investing into mutual funds.

Under growth option, you let your investments to appreciate with momentum of NAVwithout any periodic payouts. In dividend, you either exercise an option to receive dividend

payout at different intervals (which are not guaranteed) or choose to reinvest the declared

dividend in the same fund at the prevailing NAV. The NAV of the fund reduces to the extent

of the dividend declared.

For instance:

When a fund house declares 25% dividend under a mutual fund scheme (with an initial value

of Rs 10), an investor who holds 500 units under that scheme is entitled to receive Rs. 2.50

per unit of dividend on the record date. This 25% is calculated on the face value of fund,which is Rs.10 per unit. Hence, the investor will get a sum of Rs.1250 for 500 units held by

him. On the flip side, NAV falls by Rs. 2.50 per unit to Rs. 47.50 from Rs. 50 per unit. If aninvestor intents to exercise repurchase or sell after receiving dividend, he will receive

proceeds at ex-dividend NAV i.e.Rs.47.50 per unit. So, dividend never amounts to additional

gain, it's nothing but your decision to receive payout at different intervals, without need towithdraw investments through redemption route. In dividend reinvestment, the dividend

declared is used to buy the additional units of same mutual fund at the prevailing NAV (for

dividend option or ex-dividend NAV).

There is also the angle of taxation to be considered while making a choice of these

options in different categories of mutual fund: 

Equity Funds:In the current taxation scenario, investor in an equity mutual fund won't feel the brunt of taxation as dividends are tax free. For a short-term investor (less than 1 year) dividend could

prove better because dividends are tax free and due to decline in NAV, capital gains also get

reduced, which attract lesser short-term capital gain tax( taxed at rate of 15.45% for both

options) if investors prefers to exit. Under both of this option long-term capital gains are nottaxable.

Debt Funds: Though dividends are not directly taxed at the hands of investors, DDT (DividendDistribution tax) of 13.52% is deducted by the fund house before releasing dividend to

investors. For a short-term (less than 1 year) investor falling under higher tax slab, dividend

could be feasible option as capital gains are taxed at a rate applicable to income slab of individual, which is higher than tax on dividend. While a long-term investor can opt forgrowth, as long-term capital gains are taxed at a rate of 20% with indexation or 10% without

indexation, which falls below the tax on dividend.

Liquid & Money Market Funds: Investors feel maximum brunt of taxation on liquid funds,

as dividends are taxed at a rate of 27.04%. For an investor falling under lower tax slab of 10-

20%, growth can be profitable than dividend. This is because; they will lose lesser gains

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towards taxes, then dividend option. But for an investor in higher tax slab of 30%, dividend

option could be efficient. The capital gain tax remains same for both liquid and debt funds.

Ultra Short Term and Floating Rate Funds:The dividends from ultra short-term and floating rate fund are taxed like debt funds at a rate

of 13.52%. So, for an investor in higher tax slab, dividend option is preferable over growth

option, as they benefit from tax arbitrage. As decline in NAV takes place after dividend is

declared, due to which capital gains will also reduce, resulting to lower capital gain tax, if investor redeems. The growth option is only preferable when investor decides to hold for

long-term (period more than 1 year) .As investor enjoys the benefit of long-term taxation i.e.20% with indexation or 10% without indexation whichever is lower.Taxation is one of the major tools to guide your investment decision in choosing either

growth or dividend option. But in addition to this, there are other facts that also matter, like

investment horizon, requirement of liquidity, investment goal and nature of mutual fundscheme. Following are few instances among many, which justify the relevance of choosing

growth or dividend.

a)For a retired individual in need of periodic liquidity, dividend option scores over growth

option.

b) An investor looking forwards to fetch higher returns from investment over the longer

horizon of 5 or more years to fulfill financial goals like children's education and marriage

should prefer growth option.c) While those looking to cash on short-term opportunities without going for redemption,

dividend could be useful (as in liquid funds, ultra short-term and floating rate fund)

d) The dividend payout in equity fund may hinder the compounding effect as it erodes the

value of investment due to decline in NAV. Instead, growth option helps you to benefitfrom opportunities in stocks market.

The bottom-line is investor should meticulously make a choice of growth or dividend option

after considering the repercussion that might impact their value of investments and financialgoals.