Indian mutual funds come with the Equity plan, dividend plan and the dividend reinvestment plan. The latter isn’t widely accepted due to limited benefits, yet there are plenty of proponents for the growth option or dividend options.

This leaves investors with an important question: should they choose the growth option or the dividend option when investing in a mutual fund?

The answer lies in a variety of factors such as what these two terms mean, and how they differ from one another. Before making a selection, here are five key variables that can be used to decide which is more suitable. Finding the right Mutual Fund Agents in Rajkot is crucial for well-informed decisions.

The dividend earned never gets reinvested

There is a basic argument against dividend plans because you just receive the dividend and then spend it. Usually, you are quite satisfied with the intermediate flow and intend to use it for some pending purchase. You rarely reinvest the dividends. When a fund declares a dividend, it is paid out of its NAV. As a result, the NAV of the dividend plan will be reduced to the extent of the dividend.

Neither dividend nor growth plans have a different wealth effect. Since the dividend plan has taken Rs.4 out for dividend, its NAV is Rs.4 lower than the growth plan. You lose out on wealth creation if the Rs.4 taken out as dividend is not reinveste.

Growth option is more compatible with long term planning

This point succeeds the previous one. Strategizing for long term goals like retirement or your child’s education necessitates taking advantage of compounding. To do that, returns need to be consistently reinvested in the fund.

Settling for a dividend plan instead will significantly reduce wealth creation as dividends would consume most of the returns. Considerably, a growth option serves as an automatic wealth compounder and is particularly effective for compounding wealth in the long run.

Collaborate with Rajkot’s Mutual Fund Agents from https://equity-box.com/services/mutual-fund/ to align your decision with your financial aspirations and market dynamics.

Problem of double taxation in equity mutual fund dividends

The primary argument against dividend plans in equity funds is their lack of tax efficiency. Despite the fact that long term capital gains (LTCG) are taxed at 10%, growth options still offer a much more beneficial return for investors, as post the Budget 2018 such schemes will be hit with double taxation.

The company here takes out dividend distribution tax (DDT) on the dividends it pays to mutual funds and then the mutual fund deducts DDT calculated at 11.536% resulting in a net dividend being paid to holders of the fund: thus double taxation occurs and makes these plans unappetizing from a tax-efficiency standpoint.

Debt Growth Plans are also more tax efficient

You may question whether dividend plans make sense for equity funds, but what about debt funds? The answer is a resounding “No”. This is because when a debt fund declares dividends, the dividend distribution tax (DDT) of 28.84% (25% DDT + 12% Surcharge + 3% Cess) is deducted by the fund.

Alternatively, if you invest in the growth plan of a debt fund and maintain your investment for more than 3 years, it will be regarded as long term gains. In this case, you pay tax at 20%, with the advantage of indexation which proves to be more economical.

While Mutual Fund Agents in Rajkot can guide you through the decision, understanding the options is crucial. Growth option reinvests your earnings, compounding your investment over time.