Difference Between Growth And Dividend Options In Mutual Funds
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22 December 2021
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27 December 2021There 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!
Table of contents
How Are Dividend and Growth Options Different?
Given below are the primary differences between growth and dividend options –
| Elements | Dividend Option | Growth Option |
| Profit distribution | The gains generated by the mutual funds are given back to investors at specific intervals. The period can be quarterly, monthly, daily and annual. | Profits generated by the mutual fund are reinvested in the scheme. |
| Net Asset Value (NAV) | Lower than growth option | Higher than dividend option |
| Total returns | Returns are lower than the growth option | Returns are higher than the dividend option |
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
Ans: Keep in mind the following two modes when investing in mutual funds –
Lump-sum – When an individual invests a substantial amount in a mutual fund scheme all at once, it is known as a lump-sum investment.
SIP – In the case of a systematic investment plan (SIP), individuals invest a fixed amount in a fund at regular intervals (half-yearly, quarterly, monthly, etc.).
Ans: Net Asset Value or NAV signifies the market value per share of a specific mutual fund scheme. One can compute it by deducting the total liabilities and expenses from the fund’s total assets, and then dividing the result by the total number of units.
Ans: In the case of a direct plan, an individual invests with the Asset Management Company (AMC) directly, without involving any distributor or broker to assist the transaction. It comes with a low expense ratio since the commission fee is not applicable.
Ans: Indexation refers to the re-calculation of the purchase price after making adjustments for the inflation index, as guided by tax authorities. The capital gains are diminished as the purchase price gets adjusted for inflation. An investor can get the indexation benefit for LTCG in non-equity funds.
Ans: Yes, Equity Linked Savings Scheme (ELSS) helps to save taxes and facilitates capital appreciation. Under Section 80C of the Income Tax Act, 1961, an investor gets a tax deduction of up to ₹ 150,000. That said, these funds have a lock-in period of 3 years.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
