Mutual fund offers growth plan and dividend plan option for the same funds. The portfolio in which the fund invests is the same and the only difference is the treatment of gains.
In a growth option investors do not get payout in the form of dividend, instead this amount is reinvested in your fund. This increases the NAV of the fund. As there is reinvestment, the returns get compounded overtime and increase you returns in long term.
The dividend option on the other hand gives payout to investors in the form of dividend. The dividend is credited to the investor’s bank account. As the amount is not reinvested, the investors do not get the benefit of compounding. This dividend gets deducted from the NAV of your fund.
Which one you should opt?
If you have a regular income and are not dependent on the income from investment, you should choose the growth option. Due to the benefit of compounding the, your accumulated funds will be higher and you will get better returns in long term.
If you do not have regular income or you are a senior citizen/ retiree and are depended on income from investments, you can opt for dividend option. However, you should keep in mind that the dividends are not assured. You will get dividend only if the scheme makes profit and if the fund manager declares it. The chances of dividend are high when the market is high.
Tax is an important aspect to consider before deciding any investment plan. Short term gains (holding period less than one year) in equity growth plan are taxed 15%. Similarly, long term gains are taxed at 10% only if the gains are above Rs.1 lakh. Long term capital gains are not likely to cross Rs.1 lakh for small and medium-sized investors.
For dividend option, the dividend that the fund pays is tax free at the hand of investors. The amount however, is distributed after deducting dividend distribution tax (DDT) at 10%.
In case of debt mutual fund with growth option, short term capital gains (holding period less than three years) are taxed according to the tax slab you belong to. Long term capital gains on debt fund are taxed at 20% after indexation.
For debt fund with dividend option, the DDT is 25%, excluding surcharge and cess.
Hence, it is seen that growth option is more efficient in terms of tax for long term.