Mutual Fund Investment Options

In the previous article we discussed about the basics of mutual fund and the types of mutual fund available.


Here we will discuss about the investment options available while buying a particular mutual funds.

Once you have decided on which fund to buy, you may have the option to choose between the following options

• Growth
• Dividend
• Dividend Reinvestment.

Sometimes people ignore the importance of choosing right kind of option and choose arbitrarily any one of them.

So now question comes as to which options is best to invest in...Frankly there is no fixed answer. Because choosing the correct option is based on the individual needs and also on the prevailing tax laws in the country.

Growth Option -Under this option no dividend is declared and your investment change according to the change in NAV. You will be taxed on the gain based on when you sell your units. If you sell your units after 1 year no tax is cut. Otherwise you have to pay short term capital gains tax.

Dividend Option- Under this option fund sometime declare dividend when they have surplus money.
This dividend is totally tax free whether given after 1 year or within 1 year. So returns on your investment within 1 year also becomes totally tax free. When dividend is provided NAV of the fund falls in equivalent amount.
Since there is regular payout, it can be considered as regular profit booking to reduce impact of market fluctuations.

Dividend Reinvestment Option - Tax free dividend declared by the fund is reinvested in the same fund or different fund of same AMC on a particular day set. Timing of the market may not be always favorable.


Current Scenario ..
-->Debt Funds currently attracts Dividend Distribution tax and Equity Funds are exempted currently.
-->Long term capital gain(Sale after 1 year) is fully exempted for growth schemes.
-->Short term capital gain is taxed.
--> Currently in absence of dividend distribution tax on equity-based funds and no long-term capital gains tax, there is absolutely no difference between the Growth option and the Dividend Reinvestment option

Impact of Tax Changes ...
--> If dividend distribution tax is reintroduced then growth option would be better than dividend reinvestment.
--> If Long term capital gain tax is introduced then dividend reinvestment would prove better than growth option.

Hope after reading this you will have better understanding of which option to choose according to your needs and prevailing tax laws.

This article was part II of the previous article posted on mutual fund...Read previous article here....

To know more in details about these options read the following 2 articles which explains in detail about these options.

Growth or Dividend - How to make the right choice?

Dividend Reinvestment v/s Growth – Let your taxes decide