Dividend or Growth option in mutual funds – Which is better?

Dividend or growth option in mutual funds - Which is betterDividend or growth option in mutual funds – Which is better?

Last week there were series of queries from readers enquiring whether Dividend or Growth option, which is better one in mutual funds. This is one of the key points for an individual to make investment decisions in mutual funds. Mutual funds offer two types of schemes, Growth and Dividend option. Both have their own unique features. In this article, I would detail about Dividend or Growth options in mutual funds, their features, and comparison of these two and how one can choose better option to grow their investment.

Also Read: Ultra Short Term Debt funds for short term investment

What is Dividend Option in Mutual fund?

Dividend option in mutual funds is where an individual would get regular dividend / Pay-outs. These dividends are not fixed and are not guaranteed. It would depend up on the performance of the mutual fund scheme. Some times in a year, you may not get dividend at all.

What is Growth Option in Mutual fund?

Growth option in mutual fund is where an individual would not get dividend or payout. The amount invested would grow over a period of time and is paid during redemption / selling. Profit is the difference between amount received during redemption and the amount invested.

Comparison of Dividend option and Growth option in Mutual funds

1) Dividend payout: Under dividend option, regular dividends are paid. As indicated above, the dividend is not guaranteed or fixed. On other hand, growth option does not pay any dividend. The amounts are paid after you sell the units.

2) NAV would be different: NAV for these two options would be different through the scheme is same. e.g. The NAV of HDFC Top-200 (Growth) is Rs 194.71 and NAV of HDFC Top-200 (Dividend) is Rs 34.72. HDFC Top-200 is single scheme managed by a single fund manager. No difference in investment objectives. Under dividend option, due to regular amounts get paid, the NAV would be always lower compared to Growth fund. People often miss-interfere saying NAV of HDFC Top-200 (Dividend) option is low and it may be underperformer which is not correct.

3) Taxation: Dividend option in mutual funds provides dividends which are tax free. Please note that fund has to pay tax of 12.5% (Dividend distribution tax) before the dividend comes to investor.

On the other hand, growth options in mutual funds are categorized into two.

a) Equity funds and equity related funds taxation: These funds invests majority of their portfolio in shares. If you sell the equity growth option mutual funds before one year, it is short term capital gain and taxed at 10%. If you sell such funds after one year, they are long term capital gains and the profits are tax free.

b) Debt funds taxation: Profits from debt funds within one year are added to your income and you need to pay tax as per your income tax slab. On other hand, profits from debt funds of over one year are taxed at 10% without indexation and 20% with indexation.

Dividend and Growth option in mutual funds – Which is better option?

Looking at the above features, it would be little confusing about which option to be chosen. Follow these simple rules if you have short term and long term investment objectives.

I) Long term investment (5+ Years) – Buy equity funds with growth option: You should invest in equity mutual funds with growth option for capital appreciation if you are long term investor. Equity funds invest in stocks for long term as stocks tend to provide good returns in long run. The returns are tax free.

II) Medium term investment (1 Year to 5 years) – Buy debt funds with growth option: If you are medium term investor, you should invest in debt mutual funds with growth option. The main reason is you would get higher post tax returns. You need to pay tax on profits for 10% without indexation and 20% with indexation. If you consider indexation, the tax which needs to be paid would be low.

Also read: Best ELSS mutual funds to invest for tax savings

III) Short term investment (< 1 year) – Debt funds with dividend option: If you are looking for short term investment, you should invest in debt mutual funds with dividend option. Under dividend option, mutual fund companies would pay 12.5% as dividend distribution tax. On the other hand, short term capital gains from debt mutual funds with growth option would be taxed as per individual income tax slab if sold within one year. If you are in higher tax bracket of 20% or 30%, you would end up paying more tax. Under dividend option, you would pay just 12.5% as DDT, hence you would save good amount of tax.  

Conclusion: Even I made some mistakes earlier in buying debt mutual funds with growth option for < 1 year investment objective. Due to higher tax bracket, the post tax returns were very low. I felt the above points have to be considered to get higher post tax returns.

Readers, what is your investment strategy in mutual funds? Are you investing in growth or dividend option? Do you think there are any other points to be considered while choosing these options?

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Suresh
Dividend or growth option in mutual funds

Article by Suresh

Suresh KP i.e. me have written 500+ articles on this blog. I love doing analysis and identifying the Best investment options.

16 Comments

  1. Akhilesh says:

    Dear Sir,

    I want to purchase a house/plot after few years which cost around 35 lakh now.

    Pl help me to make my portfolio to realise my goal and after how many years I'd be able to do so, considering property appreciation,inflation,my investments etc?

    Im govt employee and can save 35000 every month or available for investment with no present liabilities.

    Thanks & regards,

     

  2. kamlesh says:

    I am really scared to see market condition now. i don't know, how long condition will be like this.But I belivev on Reliance mutual funds as my father used to tell me, Dheeru bhai ambani was the great person. Keep investing in his company. 

    • Suresh says:

      You are partially right. Markets condition is like this for the past 3-4 years. You should continue to invest in markets. I am not saying reliance, but invest in markets through various categories of mutual funds.

  3. Anne says:

    Sir,

    I have invested in foll mutual funds for long term.  Please advise if these are good.

    HDFC Growth Fund (Growth)

    HDFC Top 200 (Growth)

    Birla Top 100 (Growth)

    HDFC Equity Fund (Dividend)

     

    Also can you suggest a good Gold Scheme.

     

    Thanks

    Thanks

    • Suresh says:

      You have chosen good funds Anne. One request is you have chosen HDFC Equity fund Dividend where you would get regular income. Instead choose Growth fund so that you would get good maturity amount. Also looks you are too much favorable to HDFC MF’s. Try other schemes like Birla SL Frontline equity or ICICI Pru focussed blue chip funds etc. If you want to invest in gold scheme, my suggestion is to invest in SBI Gold ETF etc. I am publishing Best Gold ETF schemes in next 4 days. Please wait for that article and you would be able to take wise decision

    • Chanchal Garg says:

      Sir. I have 3 sip 1000 every sip per month 1.reliance gold fund 2.reliance growth fund GP GO 3.hdfc top 200 growth fund and a rd 2000/month I have a boy baby for 8 months I am confuse baby education and marriage and what amount I can achive after 20 years . Please help me for built best portfolio …….

      • Suresh KP says:

        Hi Chanchal, 1) Reliance gold fund is good, however you should understand that this is only gold fund and tracks underlying gold. You may expect limited returns in case you are withdrawing in short term 2) Reliance growth fund is avg fund. You can check and come out 3) HDFC Top-200 fund is good. Stay invested. My suggestion is you should invest in large cap funds to generate good returns. Invest in largecap or diversified funds like ICICI Pru focussed blue chip fund,BNPP Equity fund, UTI Opps fund and Quantum long term equity fund. You can pick any of these funds.

  4. Rajeev says:

    Hi Suresh sir, I have invested my money in Reliance Mutual Funds Growth. How long should i hold my funds for good returns !

  5. RAJNEESH says:

    Dear Suresh,

    I am investing in 5 mutual funds for past 18 months. I am ivesting Rs 2000 in each fund and plan to invest for about 10 years. The funds are as follows – 

         1. Birla Sunlife Frontline Equity Fund – Growth

         2. DSP Blackrock Top 100 Equity Fund – Growth

         3. DSP Blackrock Small And Mid Cap Fund – Growth

         4. HDFC Equity Fund – Growth

         5. HDFC Prudence Fund – Growth

    Kindly advice on my portfolio , whether it is good or needs any changes. Also I am planning to increase my investment . So should I increase the amount in these funds or should I add new funds in my portfolio.

                             Waiting eagerly for your advice.

                   Thanks & Regards 

                                            Rajneesh

    • Suresh says:

      Rajeesh, Good to note this. Pls see my comments 1) Birla SL Frontline – Good 2) DSP Top-100 – Crisil Rank-3-Avg performer-You can review and HOLD or exit 3) DSP BR Small and Midcap-Crisil-Rank-4-Below average-You can exit 4) HDFC Equity fund-Crisil-Rank-4-You can hold or exit 5) HDFC Prudence – Good fund, you can hold for long term. You can also add long term MF’s like HDFC Top-200 or ICICI Pru focussed blue-chip funds

  6. hesh says:

    Dear 

    Mr. Suresh my email id is hesh2601@yahoo.com. Already register for email. If you post anything on your blog, i got a mail in my inbox. but not a single mail i received. Pl. check.

    • Nitin says:

      See Y! has spammed myinvestmentideas mails. Make sure to verify the email address from the mail you get first time you get from myinvestmeentideas. Hope it helps!

      • Suresh says:

        Oh my god. I am not sure how to address this. Thanks Nitin for pointing it out. I would check from my end too on how can I rectify this in Yahoo database.

  7. supriya says:

    these tips are very useful… will bookmark this page!

    thanks

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