Growth vs Dividend Mutual Funds: Which one is better?
The Equity Mutual Fund comes in
various forms. You can either invest your savings in a Small-Cap Fund, Mid-Cap
Fund, Large-Cap, Balanced Fund or Multi-Cap Fund to go for. You can opt also
for an ELSS Fund if you are planning your personal Income Tax for the next
Assessment Year.
Whatever be the category of an Equity
Fund you choose to park your money in, this will either be in the nature of
Growth Plan or Dividend Plan. In this post, we are going to discuss growth vs dividend
mutual funds and which one is better for investors.
You might think that dividends from
equity funds can be used for generating regular income. However, the fact is
that regular dividend payouts are only possible if the fund generates profit
regularly.
Moreover, for an equity fund to be a
sustainable profit generating fund, the stock market is also required to be
going upwards. If the market shows correction for a substantial period of time,
it won’t take much time for the flow of regular dividend to get stopped.
Again, you might be an investor who
thinks choosing dividend plan for booking regular profit without redeeming your
units held. This might seem to be good as a strategy on the paper but, for its
execution, proper planning is required.
Further, it could also be possible
that you have just read the names of these two plans for the first time and completely unaware of the idea behind Growth and Dividend plan.
You might not know what they actually mean and end up selecting something
randomly just for the sake of investing in an Equity Fund.
Growth vs
Dividend Mutual Funds
Now, let us understand how Growth
Plan and Dividend Plan work in real life.
In the Growth option, the profits in
the form of capital appreciation and dividend, made by your scheme are
re-invested into the same fund. This will lead to the rise in the Net Assets
value (NAV) of the scheme with time.
When the underlying portfolio of the
fund makes profits, the NAV of its units rises. Similarly, you’re your fund
runs at a notional loss, supposedly due to the market correction, the NAV of
the same fund goes down.
In the case of Dividend Plan, the
profits made by your fund are not reinvested back into the fund by the Fund
Manager of the Asset Management Company (AMC). You get a share in the said
profits in the form of dividends from time to time.
The amount of dividend you get and
the frequency of getting the same are not predetermined. Dividends are only
declared by the AMC when the scheme realizes profits in real.
In the Dividend option, the dividend
is paid to you from the NAV of the units you hold, so paying dividend reduces
your overall NAV.
Now you have come to know how Growth
Plan and Dividend Plan work. Our recommendation would be to go for the Growth
option.
Why Growth
Plans?
Let us discuss why you should choose
Growth option over Dividend Plan while investing your savings in Equity
oriented Mutual Fund.
For example, if your Long-term
Capital Gain in a growth plan investment is Rs 50000 for the Financial Year
2018-19, you don’t need to pay a tax on it. But, if the same becomes Rs 150000,
then LTCG tax is chargeable on Rs 50000, i.e. the amount in excess of Rs 1lakh.
On the other hand, if you have
invested in a dividend plan, the entire dividend you have received is subject
to DDT. No exemption limit is applicable to an equity dividend option similar
to a growth plan equity scheme. The equity funds with growth plan are more
appropriate for long-term wealth generation than dividend based equity funds.
The amount of dividend you would receive in the latter option is not going to
be a significant one.
You are most likely to spend that
money in your day to day expenses and it is hardly going to be reinvested by
you in the market.
But, if you have invested in a
performing equity fund with growth option, the latter refrains from paying you
any return in cash. So, the returns get reinvested in the same fund and get
compounded year on year. This leads to the generation of substantial wealth in
the long term.
What if you
have already invested?
If you have invested in a dividend
plan and the duration has crossed a year, you are recommended to switch to the
growth option within the Financial Year 2018-19. Here, switching means
redeeming units of one fund and investing the proceeds in another scheme.
