Investing in Mutual Funds – Dividend or Growth Option?

Mutual Funds

In most mutual funds schemes an investor can choose what s/he wants to do with the profit made on his investments — get it in hand (I mean bank account) or plough it back into the mutual fund scheme. Just a few days ago I was asked this question by a friend — which option should one pick while investing in a mutual fund — Growth or Dividend?

The answer — this post, explaining the difference that should be of benefit to all.

PROFITS

The basic difference is in the way the returns on investments are treated. In a growth option, any profit made on investment is not distributed but retained in the scheme. In a dividend option, the investor gets back the return as dividend.

NET ASSET VALUE (NAV)

In the dividend option, the value of the scheme’s assets fall once dividend is paid out. Hence, the scheme’s NAV is usually lower in the dividend option compared to the growth option.

TAX TREATMENT

The tax treatment is different for the two options. Dividend from an equity fund is tax free, but dividend from a debt fund is subject to dividend distribution tax (DDT) in the hands of the MF at 14.2%, including surcharge and cess. This tax is paid out of the dividend earned.

Photo by: Noël Zia Lee

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Author: Austin Comments: 0 comments Date: 18 Apr 2010
Categories: Mutual Funds Tags: , , ,
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