Understanding Key Differences Between Growth and Dividend Options in Mutual Funds
Most investors who are investing in mutual funds have come across two fundamental options like growth and dividend. Each of them serves a purpose for different investment goals and investor preferences. Let’s break the key differences here:
Profit Distribution
- Growth Option: The mutual fund distributes the earnings realized to be reinvested back into the scheme. As a result, the NAV of the fund increases because there is an opportunity for compounding over time through this reinvestment.
- Dividend Option: A portion of the earnings made is distributed to the investors at certain intervals, most on an annual basis. These payments give the investor some periodic income from the investment.
NAV Dynamics
- Growth Option: The NAV rises with time because the earnings are reinvested, showing the compounding of the investment over time.
- Dividend Option: For every dividend that is paid out, the NAV declines by the amount paid as the fund’s assets are diminished by the dividends paid.
Suitability According to Investor Objectives
- Growth Option: Suitable for investors seeking long-term capital appreciation and require no current income from the investment. This is good for individuals looking to generate wealth over an extended period of time.
- Dividend Option: Best suited for investors who would require income flows from their investments on a regular basis, either retirees, or somebody who needs cash immediately. Note that dividend payments may be dependent on the performance of the fund and are certainly not guaranteed.
Tax Implications
- Growth Option: Tax is levied at the time of redemption of units. In the case of equity funds, LTCG exceeding Rs.1 lakh is taxed at 10% and STCG at 15%. In the case of debt funds, LTCG above Rs.1 lakh is taxed at 20% with indexation benefits, while STCG is taxed according to the income tax slab of the investor.
- Dividend Option: Dividends are taxed in the hands of the investor based on the applicable income tax slab rate. Besides, a TDS of 10% applies if the aggregate dividend distributed in a financial year exceeds Rs.5,000.
Choosing between the growth and dividend options in mutual funds depends on individual financial goals, income requirements, and investment horizons. Investors should assess their need for regular income versus long-term capital appreciation and consider the associated tax implications to make an informed decision.
