Difference Between Growth And Dividend Options In Mutual Funds

Mutual funds

There are two options for investors in mutual funds – growth and dividend. According to experts, an individual’s investment objective determines the option selected. 

If you want to know the difference between growth and dividend options in mutual funds, keep reading this article!

How Are Dividend and Growth Options Different?

Given below are the primary differences between growth and dividend options –

Who Can Choose Growth Option? 

Investors who do not require regular cash flows might opt for the growth option. NAV is higher in this option because of the reinvestment of profit. The funds create “profits on profits”, and therefore benefit from the compounding effect.  The returns, in this case, are comparatively higher than dividend options in the long run. 

Growth options are suitable for an investor who has a risk-taking capacity and a long-term investment horizon. This option can also suit individuals under the 10% tax slab since the Dividend Distribution Tax (DDT) is not there. The NAV of the growth option in mutual funds is always higher than that of the dividend option. This is because the reinvested amount in case of the growth option may rise in value with time.    

Who Can Choose Dividend Option? 

Investors who need regular cash flows can opt for dividend options. That said, the post-dividend NAV is usually lower in the case of the dividend option. This makes the post-dividend Net Asset Value lower. Due to interval payouts, overall returns are also lower relative to growth options over time.

Dividend options are suitable for individuals looking for regular income, for example, investors who have retired or not earning any longer. In other words, the dividend option is worth considering for individuals who lack income stability. 

Furthermore, an individual who falls under the tax slab of 20% to 30% or above can choose to avail of this option because of the relatively lower Dividend Distribution Tax. 

As the dividends are taxable in the hands of tax-paying individuals, this option can be suitable for investors whose total taxable income is less than or equal to ₹ 5 lakh. This is because one is eligible for a tax rebate under Section 87A of the Income Tax Act, 1961, making the dividends tax-free. 

Also Read – https://navi.com/blog/ter-in-mutual-funds/ 

Tax Implications 

Taxes on dividend options depend on an investor’s income tax bracket. However, for growth options, taxes are applicable after fund redemption. Read on to know the details concerning taxation!

For Dividend Option

• TDS deduction of 10% from the dividend income is applicable for a resident individual. 
• If the dividend distributed or about to be distributed to an investor in a fiscal year is not above ₹ 5000, then there is no TDS deduction. 
• In the absence of PAN, the TDS rate is 20%.

For Growth Option

Before redemption of funds – There are no tax implications in the case of the growth option. 

For debt funds 

• After permitting indexation benefits, long-term capital gains (when the holding period is more than 36 months) are taxed at 20%. 
• Short term capital gains (when the holding period is less than 36 months) are taxed as per an investor’s income tax slab. 

For equity funds 

• Long term capital gains (when the holding period is 1 year or more) up to one lakh rupees is tax-exempt and afterwards taxed at 10%. Keep in mind that the indexation benefit is not applicable in this case. 
• Short term capital gains (when the holding period is less than 12 months) are taxed at 15%.  

Also Read – https://navi.com/blog/all-about-direct-plans/ 

Final Word

An individual can choose an option based on his/her investment objectives and needs. The total returns from your investment depend on whether you have selected debt or equity funds. 

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Frequently Asked Questions

Before you go…

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.