Dividend Payout and Growth Options within Schemes

Dividend Payout and Growth Options within Schemes

Mutual funds offer two primary options for investors when it comes to receiving returns on their investments: dividend payout and growth. The dividend payout option refers to the process by which the mutual fund distributes the profits it has earned from its investments to its investors. The dividend amount is usually calculated as a percentage of the net asset value of the fund. The payout frequency can vary, with some funds providing monthly, quarterly or annual payments. Investors who choose the dividend payout option may receive a regular income stream, but this option may not be suitable for those who want to reinvest their earnings for future growth.

On the other hand, the growth option is designed to provide investors with capital appreciation over the long term. Rather than distributing profits as dividends, the fund reinvests them back into the portfolio, with the goal of increasing the net asset value of the fund. This approach is ideal for investors who are focused on long-term capital appreciation rather than regular income. In addition, the growth option allows for compounding, which can result in significant returns over time.

Investors should carefully consider their investment objectives, risk tolerance, and time horizon when selecting between the dividend payout and growth options. The choice will depend on their individual circumstances and goals. Some investors may prefer the regular income stream provided by dividend payout, while others may prefer the potential for long-term growth provided by the growth option. It’s important to consult with a financial advisor before making any investment decisions to ensure that the chosen option aligns with their financial goals and objectives.

There are 3 ways to utilise the returns from a mutual fund investment. They are growth option, dividend payout, and dividend reinvestment. The tax angle of the three options depends on the type of scheme- whether it is a debt or equity oriented scheme. The holding period- whether long term or short term is also a determinant. Dividends of mutual funds of both equity and debt funds are tax free in the hands of the investor. However debt funds do require a dividend distribution tax of 12.5% to be paid. This DDT is borne by the investor, as a cut from the NAV.

Equity funds attract a short term capital gain tax and it is not applicable to long-term capital gains tax. Debt funds on the other hand, attract both long term and short term capital gain tax.

In short,

• Growth Option: Growth options do not attract Dividend Distribution Tax.
• Dividend Payout and Reinvestment Option: The dividend declared by mutual funds would be tax-free at the hands of the unit holders. Investors have to bear Dividend Distribution Tax.