Investors are always in a fix when asked to choose between the dividend and growth option of mutual fund schemes. Although both belong to the category of fixed income funds, they both have their advantages and disadvantages which need to be analyzed critically. Several factors need to be taken into consideration before selecting a particular type of mutual fund scheme. The first and the basic criterion in this regard to estimate your cash flow requirements. If you do not have any interim cash flow requirements, then the growth option is your best bet as an investor, since the returns are clearly reflected in the movement of the Net Asset Value (NAV) of your mutual funds. As an investor, you are also steered clear of all hassles involved in the process of investing in interim cash flows. If you require interim cash flows from your investment, then the dividend option is best for you. It would be a partially custom-made package for the investor as the frequency of the dividends would cater to your requirements and the frequency options of the fund, as per your need, in a monthly, quarterly or annual basis.
In this light, the Asset Management Company is required to maintain the frequency of the stated dividend, which will be subject to the availability of the distributable surplus. It is also important to consider the tax parameter while making a choice between the growth and dividend option of mutual fund schemes. Although dividends are tax-free alternatives, a dividend distribution tax is imposed and deducted by the AMC on behalf of the investor, and is paid to the Government. It is a variable tax rate which is 25% in case of liquid funds, 12.5% for individual investors of non-liquid fixed income funds and 20% for corporate investors of non-liquid fixed income funds. Recently, there was a hike of 30% in the dividend distribution tax rate for corporate investors in all areas of fixed income funds. On the contrary, investors do not have any taxable distribution commitments in the growth option, and thus, a higher sum lands into the pocket of the investor. However, according to the current tax laws, the taxes that can be imposed on the growth of mutual funds depend on their respective holding period. Thus, returns from mutual funds that have been held for less than a period of one year are called STCGs or short-term capital gains. On the other hand, holding that have been maintained for a period greater than one year are called LTCGs or long term capital gains. Thus, depending on the requirements and preferences, an investor must make an informed choice between the growth and dividend options of mutual funds.
However, Mutual funds are subjected to market risks. Make sure that you gain all the knowledge and information you can about the market and the fund that you are investing in. Hire a financial planner to help solve your investing vows but ensure the safety of your funds by keeping a track of your portfolio. Tracking does not mean to move your funds out from a particular fund in case of a poor performance but to ensure their safety for a better performance in future depending on their tenors. Home loan, personal loans etc., are not the kind of debt you wish to buy if you want to invest in Mutual Funds. Debt can be reduced the returns on your portfolio, so as to maximize your returns, invest wisely and track your portfolio; reassess your portfolio at least once in a year; and as to whether the growth is being achieved in a desired way.