Growth, Dividend and Dividend Re-investment. Which one is better for Mutual fund?

Growth, Dividend and Dividend Re-investment. Which one is better for Mutual fund?

 

https://www.youtube.com/watch?v=qA88KYKdSSk

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Which one is better for Mutual Funds?

Growth Plan:

Growth plan of a mutual fund does not offer any payout.

Profits made on the portfolio are necessarily ploughed back into the scheme.

These growth plans are continuous compounders of your wealth.

Dividend Payout Plan:

In this plan, the fund declares dividends out of profits.

A fund can pay dividends only out of profits and not out of capital.

That is applicable to equity funds and to debt funds.

The NAV of the dividend plan reduces to the extent of the dividends paid, which is why you will find the NAV of a dividend fund always lower than a growth plan.

Dividend Reinvestment Plan:

In a dividend plan, the dividends are paid out in cash to the unit holders. However, in the dividend reinvestment plan the mutual fund buys units to the extent of the dividend declared by the fund at the post-dividend NAV and credits units to the account.

Some key takeaways from the analysis of these 3 different plans…

1. The number of units remains the same in case of the growth plan and the dividend payout plan. However, in case of the dividend Re-investment  plan the number of units increase due to fresh units allotted in lieu of dividends.
2. The post dividend NAV will be the same in case of the dividend payout plan and the dividend reinvestment plan. The only difference between the two is that in one the dividends are paid out in cash and in the other the dividends are paid out in units of the fund.
3. In value terms, the reinvestment plan is the same as the growth plan since in both the cases the dividends have been reinvested into the fund. It is just the method of reinvestment that has changed. With equity dividends now attracting dividend distribution tax (DDT) , the attractiveness of dividend reinvestments could reduce even further.
4. Dividend distribution tax of 28.84% has to be paid on the dividends declared. However, this is not applicable for growth option. Here’s how dividend distribution tax makes it noteworthy to understand which option is better in terms of tax-saving for you.

When growth option is better for you:

Here are the situations when growth option proves to better for you:

Making long-term investments in equity funds: When you make long-term investments, the taxation on the gains is according to the Long-term Capital Gain (LTCG) tax which is tax-free up to Rs 1 lakh and taxable at 10% on gains above that. Opting for dividend reinvestment would mean DDT, so growth option is more favorable in this case.

Falling in lower tax slabs, i.e. 10% and 20%: If you fall in a lower income tax slab of 10% or 20%, then opting for dividend reinvestment and paying 28.84% DDT makes no sense.

Investing in debt funds for short-term and fall in lower tax slab: When you invest in debt funds for short-term, it attracts income tax on the returns. If you fall in the lower tax slab, then growth option is better than dividend reinvestment, as you tend to pay only 10% or 20% tax based on your tax slab.

When dividend reinvestment option is better for you:

Investing in debt funds for short-term and fall in 30% tax slab: When you invest in debt funds for short-term, it attracts income tax on the returns. If you fall in the higher tax slab, then dividend reinvestment option is better than growth, as you tend to pay only 28.8% on dividends than paying 30% tax based on your tax slab.