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Growth Or Dividend: Which is a better Mutual Fund Investment plan?

By: Makemymoney

Mutual Fund investment offers you two type of plans: Dividend plan and Growth plan. However, both of the plans are good and the difference between both is quite simple. The dividend is declared only when the scheme makes a profit and it is at the discretion of the fund manager.  Dividend plan pays a dividend out of profit earned. However, the fund is not permitted to pay a dividend out of capital. In Growth plan, no profit or fund is share out with an investor. The profit earned undergrowth plan has been reinvested in the fund and therefore your wealth compounds.

Now if we talk about whom to choose what plan, then growth plan is good for those who don’t want regular profit in their accounts. However, in dividend plan investor receives some part of the profit on a regular basis. So, I think the growth plan is good for investors who fall in 30 to 40 years of age group. And dividend plan will be a perfect option for retired or those who want to invest after a certain age. But again depending on the individual situation you can go for any of these. But first, let’s take a look at what these plans are all about in the example….

Growth Plan

  Dividend Plan

Dividend

Invested Amount (Rs)

Profit   Invested Amount (Rs)

Profit

 
1,00,000/- 1,20,000   1,00,000/- 1,20,000 10,000
1,20,000 1,44,000   1,10,000 1,32,000 16000
1,44,000 1,72,000   1,16,000 1,39,000 19500
1,72,000 2,06,000   1,19,500 1,43,400 21700
2,06,000 2,47,000   1,21,700 1,46,040 23020
2,47,000 2,96,640   1,23,020 1,47,624 000000
           
  2,96,640/- 58796 2,37,844/- 1,47,624/- 90200

 

If you look at the above instance, return in both the cases is almost the same. Then what are the factors that help in deciding which plan will be best suitable for whom? There are three points on which dividend plan and growth plan depends.

Compare Tax implications of a dividend and growth plan

Making selection between growth and dividend plan is very important. Dividend paid by the mutual fund to an investor is tax-free. However, the fund deducts DDT at the rate of 10% from dividend distributed. After DDT, only net pay amount will be paid out to the unitholder. If you are looking for investment less than 1 year, then dividend plan is of no use. But if fund invested for long duration then it becomes LTCG and is taxed at 10%. This 10% taxed is applicable to the invested amount which should be more than or equal to 1Lakh.

The growth plan is classified as STCG if held for less than 1 year and taxed at 15%. Growth plan will be more effective for small and medium-sized investors. As the annual dividend may not cross the limit of 1 lakh hence plan will be effective. Even larger investors can also look out for growth plan as it is more effective than dividend plan.

If retired or looking for regular income?

Dividend plan is best for retired investors or for those who want regular income. And retired investors always look out for regular income. Also, their risk appetite is low hence they prefer to invest in debt or liquid funds. The DDT tax charged at the rate of 29.12% in case of liquid or debt funds.  But if you plan your payout according to SWP then you will be taxed on the capital gains component.

Out of Growth or Dividend which one is better for Long-Term Investment?

In this case, dividend plan scores. You can compare this with the example shown above. When an investor decides to invest in a dividend plan, there is a regular profit and to that extent your NAV reduces. But usually, investors don’t reinvest dividend they receive and use it for other purposes. Whereas in the growth plan, is more sync and dividend reinvested and hence it works best. A growth plan ensures that investor can estimate returns more credibly and hence long-term wealth creation becomes more predictable. In the case of growth plans, the power of compounding works. So the growth plan is always more in sync with financial planning than the dividend.

 

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