What Is The Difference Between Dividend and Growth Option In Mutual Funds?
Mutual funds are an attractive investment option for two reasons. Firstly, these are less risky when compared to investing in direct equities. Secondly, mutual funds offer inflation-beating returns in comparison to debt instruments.
Even the government has been promoting mutual fund investment and is providing a tax exemption on ELSS investments of upto INR 1.5 lakh/year. This a mutual fund that has a lock-in period of three years and thereafter the earnings as well are tax exempt.
There are several types of funds, such as equity, debt, and balanced. In addition, there are growth and dividend options. The question that retail investors then have to answer is, “Which type of mutual fund to invest in?”
Of all the types of mutual funds available in the market, the retail investor generally narrows down to a final choice between dividend and growth funds. In order to make an informed decision on the same, you need to understand the differences between dividend and growth mutual funds first. Here are four such distinctions between the two:
- How Do The Two Options Affect Your Wealth Creation?
- How Do The Plans Affect Your Long Term Goal Planning?
- What Is The Effect Of Growth and Dividend Plan on Liquidity?
- What Are The Taxes Applicable For Growth and Dividend Options?
Now let’s look at the points in more detail:
1. How Do The Two Options Affect Your Wealth Creation?
When you opt for the dividend option, the earnings are paid out based on the number of units held and the rate. You are then responsible to invest the earnings in another investment instrument of your choice. Such payouts are generally spent and seldom reinvested, thus leaving the earnings at maturity remarkably lower as compared to growth mutual funds.
In comparison, if you choose the growth option, the dividend income is reinvested in the fund. Therefore, growth funds deliver better opportunities for wealth creation in the long term except if you reinvest the dividend income in an instrument that earns the same growth rate.
2. How Do The Plans Affect Your Long Term Goal Planning?
An important consideration when investing in mutual funds is to earmark these for specific long-term financial objectives. Some of these may be to accumulate an amount that is used as down payment towards your car or home. Alternatively, your goals may be a foreign holiday, children’s education, or your retirement.
When it comes to choosing dividend vs. growth mutual funds for life goals, growth funds come across as the ideal option. This is particularly because of the compounding effect of the earnings being reinvested throughout the entire investment tenure. It is advisable to set a different mutual fund for each life goal and invest in growth funds to meet these.
3. What Is The Effect Of Growth and Dividend Plan on Liquidity?
Off all the differences between dividend and growth mutual funds, the liquidity aspect is the one wherein dividend funds have an edge over growth funds. This is because dividend funds give out dividends that you can choose to either reinvest or spend them on necessities.
On the other hand growth plans might have certain time limit and might even charge an exit load before you can take out money from your mutual fund investments.
4. What Are The Taxes Applicable For Growth and Dividend Options?
Income earned from dividend funds is currently taxed at 10%. Similarly, when you hold growth funds for one year or longer, the long-term capital gain tax is applicable, which is currently also 10%. But, the dividend tax is applicable on every dividend, whereas the tax on redeem units from your growth plan happens only once.
The ultimate goal of all investments is wealth creation and accumulation over the long run. The growth funds are the ideal instrument to help you achieve that goal.
How To Choose Between Dividend and Growth Option?
Having understood dividend vs. growth mutual funds, the challenge now is to choose from amongst growth funds available in the market. To answer this question, you will have to compare all the growth funds on various aspects and this would require a certain amount of technical understanding, if not expertise.
It requires a lot of research to screen the different options. Consulting with different people is rather confusing as everyone has a different viewpoint, expertise, and access to distinct research data.
To avoid any such confusion, Angel Bee has come up with a proprietary ARQ investment engine that is free of all human bias and is technologically advanced. It provides recommendations based on evaluations run by the application machine that takes into account all the available information on the instruments and their past performances.
ARQ is the ideal tool that enables you to make informed decisions on your investments needs and set more efficient income targets. It makes investment extremely easy for you with its vast and in-depth research that is translated into simple and comprehensive tips.
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