Document

Dividend or Growth Option: Purpose, Suitability, Taxability

Updated on: Jan 11th, 2022

|

6 min read

Investing in mutual funds involves choosing between dividend or growth option. The choice ultimately depends upon your financial objectives. This article covers the following:

What Is a Dividend Option?

In case of a dividend option, profits made by the scheme are not reinvested in the scheme. Instead, gains will be distributed among the investors by way of dividends; on a quarterly, half-yearly or annual basis. However, the fund doesn’t guarantee as regards the amount and frequency of dividend payment.

Usually, the fund manager declares the dividend only when the scheme generates profits. Dividends are paid by redeeming equivalent units of the scheme. Suppose you invest Rs 10 in an equity fund. The NAV of the fund increases to Rs 15 and the fund manager declares a dividend of Rs 2. After the payment of dividend, the NAV of the fund falls to Rs 13.

What Is a Growth Option?

You may perceive the growth option like a cumulative option. The profits made by the scheme are not paid by way of dividend. Instead, these get accumulated and form part of the scheme via reinvestment.

So, whenever the scheme makes a profit, its NAV rises automatically. Conversely, when the scheme suffers a loss, the NAV falls. The only way to get back profits is to sell units of the scheme. Suppose you buy 100 units of an equity fund at a NAV of Rs 40. Under the growth option, the NAV of the scheme rises to Rs 50 in one year. You sell the units and receive a sum of Rs 5,000. Hence, your profits from the investment are Rs 1,000 (Rs 5,000-Rs 4,000).

What Is the Purpose of Having Different Options

While choosing a mutual fund, an investor requires to make a range of choices. Among them, the most puzzling decisions are the ones relating to choosing between growth option or dividend option. These options relate to how the fund needs to deal with the gains made by the fund over time. Each option has its own set of advantages and disadvantages.

An investor needs to make a choice based on their personal financial goals and needs. However, once the investor gains clarity on these aspects, making a choice will seem breezy. The NAV of the dividend option of a mutual fund scheme might be different from that of a growth option. In fact, in most of the cases, NAV of growth option is found to be higher than the dividend option.

Investors might wonder if the schemes are different or same?

The scheme is the same and the difference in NAVs is due to the compounding effect. In both options, the scheme invests in identical securities but the manner of distribution of profit varies. The investment objective, holdings, performance and fund manager, remains the same. Only the manner of delivering returns changes.

Which Option Is Suitable for the Investor?

Whether to go for dividend option or growth option solely depends on your needs. Dividend option works best when markets are at all-time high. As the NAV of the fund rises consistently, the likelihood of fund declaring dividends is higher. Moreover, if you are dependent on your investments for a regular income, the dividend option might work for you.

However, you may lose on the compounding of returns aspect as dividends won’t be reinvested in the scheme. Wealth accumulation may slow down as compared to growth option. Growth option can be suitable for investors having a long-term investment horizon. It will help them in accumulating corpus for retirement. Moreover, in case you earn a regular income and aren’t in need of dividends, go for growth option.

How are Different Options Taxed?

Both of the options will have different tax treatment. In the Budget 2018, a dividend distribution tax (DDT) at the rate of 10% has been proposed on equity-oriented mutual funds. The dividend will not be taxed in the hands of investors. However, the DDT might reduce their return on equity funds. As regards growth option, long-term capital gains over Rs 1 lakh on equity funds will be taxed at the rate of 10%.

How to Switch From Dividend to Growth Option?

It is possible to switch from dividend option to growth option or vice-versa. It would entail sale of old units and purchase of new units. This might attract exit loads along with a tax on capital gains. Before you switch from one option to another, check for both of these aspects.

How to Invest in Mutual Funds?

Investing in Mutual Funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:
Step 1: Sign in at cleartax.in
Step 2: Enter your details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favorite mutual fund from amongst the hand-picked mutual funds

inline CTA
Invest in Direct Mutual Funds
Save taxes upto Rs 46,800, 0% commission

Public Discussion

Get involved!

Share your thoughts!

summary-logo

Quick Summary

Mutual fund investors choose between dividend or growth options based on financial goals. Dividend option distributes profits as dividends, while growth option reinvests profits. Choosing between options depends on needs and goals. Tax implications differ for both options. Investors may switch between options, bearing potential exit loads and capital gains tax.

Was this summary helpful?
liked-feedbackliked-feedback

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption