“Should I select growth option or take out the dividends in my fund?” – A question commonly asked by many, when it comes to mutual fund investments. The decision between Growth and Dividend reinvestment option typically takes the center stage post you analyze other factors.
Mutual funds offer two options – Growth and Dividend. When it comes to dividend, you can either choose to transfer the dividend in your bank account or reinvest in the same fund. In the reinvestment option too, profits are largely stripped. But here, rather than giving them as cash, they are allotted to the investor as units at the prevailing NAV. Hence, with these additional units to your current investment, you continue staying invested in the fund.
In fact, the other alternative is that you could do the same after receiving the dividend, draft a cheque to invest the dividend amount into the respective scheme of your choice. The only difference that this would make is the time saved in the latter.
When caught in dilemma regarding the choice of options, you need to consider the following factors:
Preference between having a regular income or wealth accumulation
Whether to go for growth option or dividend option, it completely depends on the investor. It’s a regular choice to be made between having an income or capital appreciation. While selecting an option, you may be directed by your goals. As an investor, you need pursue goal-oriented investing against short-term. If you are an investor who has period liquidity needs, then you may opt for dividend payout option. In contrast to this, if you are an investor who believes in having wealth accumulated via appreciation in the value of investments made, then growth option is the right one for you.
Tax angle of Growth V/s Dividend option
The dividends are tax free that you receive, as an investor. Here, you do not have to pay any more tax but the fund house pays DDT (Dividend Distribution Tax). The DDT is paid on the dividend declared and later, you receive the amount net of tax. In case of a tax on capital gains, the period of holding is clearly defined. Capital gains typically occur when the value of holdings have increased at the time of redemption in comparison to the time of investment.
The tax rates vary for short-term and long-term and also for debt funds and equity funds. The holding period for equity funds is less than 1 year which is considered as short-term, here; the capital gains would attract about 15% tax. In case of debt funds, the holding period is less than 3 years, regarded as short-term and capital gains would attract tax basis the income tax bracket you fall in.
Investment Approach
Investing in mutual funds can either happen via SIPs or lump-sum mode. Your investment approach would have an impact on the option you choose – growth or dividend. In case of Lump-sum investment, you may opt for dividend option in order to have regular income. In contrast, it wouldn’t be right to go for the same in case of SIP mode.
Consider your investments basis the above routes, but if you wish to switch, do consider the exit load and capital gains that you may suffer. This is applicable especially if your holding period is less than a year.
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