Some of The Best Options in Mutual Funds Such as Dividend or Growth, Details are Here. Mutual funds offer two types of schemes, Growth and Dividend option. Both have their own unique features.
Best Options in Mutual Funds Such as Dividend or Growth.
In this article, I would detail about Dividend or Growth options in mutual funds, their features, and comparison of these two and how one can choose better option to grow their investment.
What is Dividend Option in Mutual fund?
Dividend option in mutual funds is where an individual would get regular dividend / Pay-outs. These dividends are not fixed and are not guaranteed. It would depend up on the performance of the mutual fund scheme. Some times in a year, you may not get dividend at all.
What is Growth Option in Mutual fund?
Growth option available in mutual funds is the one in which an individual does not get any dividend or payout. The amount invested would grow over a period of time and is paid during redemption / selling. The profit is calculated as the difference between the amount received during redemption and the amount invested.
Comparison of Dividend Option and Growth Option in Mutual funds
- Dividend payout: Under dividend option, regular dividends are paid. As indicated above, the dividend is not guaranteed or fixed. The growth option does not pay any dividend. The amounts are paid after you sell the units.
- NAV would be different: NAV for these two options would be different through the scheme is same. E.g. The NAV of HDFC Top-200 (Growth) is Rs 194.71 and NAV of HDFC Top-200 (Dividend) is Rs 34.72. HDFC Top-200 is single scheme managed by a single fund manager. No difference in investment objectives. Under dividend option, due to regular amounts get paid, the NAV would be always lower compared to Growth fund.
- Taxation: Dividend option in mutual funds provides dividends which are tax free. Please note that fund has to pay tax of 12.5% (Dividend distribution tax) before the dividend comes to investor.
On the other hand, growth options in mutual funds which are categorized in two parts:
- Equity funds and equity related funds taxation: These funds invests majority of their portfolio in shares. Selling the equity growth mutual funds before one year, it is short term capital gain and taxed at 10%. If you sell such funds after one year, they are long term capital gains and the profits are tax free.
- Debt funds taxation: These funds profits within one year are added to your income and then you have to pay tax as per your income tax slab. Profits from debt funds for over one year are taxed at 10% without indexation and 20% with indexation.
Here are simple rules if you have short term and long term investment objectives:
- Long term investment (5+ Years) – Buy equity funds with growth option: You should invest in equity mutual funds with growth option for capital appreciation if you are long term investor. Equity funds invest in stocks for long term as stocks tend to provide good returns in long run. The returns are tax free.
- Medium term investment (1 Year to 5 years) – Buy debt funds with growth option: If you are medium term investor, you should invest in debt mutual funds with growth option. The main reason is you would get higher post tax returns. You need to pay tax on profits for 10% without indexation and 20% with indexation. If you consider indexation, the tax which needs to be paid would be low.
- Short term investment (< 1 year) – Debt funds with dividend option: If you are looking for short term investment, you should invest in debt mutual funds with dividend option. Under dividend option, mutual fund companies would pay 12.5% as dividend distribution tax. On the other hand, short term capital gains from debt mutual funds with growth option would be taxed as per individual income tax slab if sold within one year. If you are in higher tax bracket of 20% or 30%, you would end up paying more tax. Under dividend option, you would pay just 12.5% as DDT, hence you would save good amount of tax.