Growth-Vs-Dividend

Mutual Fund and stock dividends are two different things. While stock dividends represent the profits earned by a company, mutual fund dividends are not an indicator of the profitability of a mutual fund scheme.

High mutual fund dividends do not mean that the fund is doing very well or otherwise. When a mutual fund scheme declares a dividend, the NAV (Net Asset Value) of the concerned scheme falls by a corresponding amount. For example, if a mutual fund with a NAV of Rs 30 declares a dividend of Rs. 2 per unit, the NAV of the scheme will fall to Rs. 28 per unit.

Hence, an investor should not invest in a mutual fund just because it pays high dividends and should think as to which plan of the scheme suits him/her more – growth or dividend

Tax treatment plays an important role while selecting Growth or Dividend Plan.

The growth and dividend plans of a mutual fund are taxed in the following manner:

Dividends of equity mutual funds attract dividend distribution tax at 10%. This is slightly less than the short-term gains tax, which growth mutual funds attract at 15% (for holding periods less than 1 year). However, it is the same as the long-term capital gains tax, which growth mutual funds attract at 10%.

Dividends of debt mutual funds attract dividend distribution tax at 25% along with surcharge and cess, which makes the total DDT reach nearly 29%. This is very close to the highest slab rate for income tax in India at 30%.

In case of growth option, the short-term capital gains on non-equity funds (including debt funds) are paid as per the income tax slab rate. Hence, if you are a 30% slab investor, you will pay almost the same tax on growth and dividend options. However, if you are a 10% or 20% slab investor, you will pay a lower tax on growth options of mutual funds.

In case of long-term capital gains tax on non-equity mutual funds, you pay 20% after indexation, regardless of your income tax slab. This is substantially lower than dividend distribution tax at 29%.

The criteria to decide which is a better plan between growth and dividend varies from investor to investor depending upon his/her investment objective.

However, on a general note, the growth option of mutual funds is better than the dividend option.

The following are the reasons as to why growth option a better choice:

• Mutual fund dividends do not give an insight into the scheme’s performance as they are not an indicator of the profitability.
• Mutual fund dividends do not create value, they only distribute value. Thus, there is no wealth creation and appreciation under the dividend option.
• An investor has no say regarding the timing of declaration of mutual fund dividends.
• Mutual fund dividends attract higher tax rates than capital gains involved in the growth option of the mutual fund schemes in most scenarios.