Wednesday, 15 March 2017

Dividend Mutual Funds and Growth Mutual Funds

To choose Growth or Dividend option while putting money in Equity mutual funds? Though many of us just like to invest money and don’t think much about what are the options that are there in Mutual funds, some of us do think about it in detail before taking a decision. There is enough material available to understand these options and this post can be just one of those many but in my words.  

I just want to make one thing clear that Dividend and Growth options are exactly same funds with exactly same investments, only difference is how these funds manage the Profit accrued in certain amount of time.  

Growth funds keep investing the Profits made on investment, so if your investment makes 10 Rs Profit on 100 Rs in certain time, that 10 Rs will be invested in same fund so here your unit's NAV value increases and not the count of units.

Returns in Growth Funds:

This option gives compounding return because your profits are getting Re-invested. Note that it is not compounding interest that banks give, it is compounding return which might be uncertain when mutual fund’s performance goes down after some good profitable years. Say if you invest 100 Rs on X-date and Mutual funds gives 10% return every year for 3 years, so as per rule of compounding return, after 3 years your return will be 33% .

Dividend Funds share partial profit with investors and invest remaining profit, so if your investment makes 10 Rs Profit on 100 Rs in certain time, then 3-5 Rs will returned to as dividend and remaining will be invested in same fund hence it will increase unit's NAV value but not as much as in Growth option. 

Returns in Dividend Funds:

This option gives assured (of-course only in case of profitable performance of funds) + compounding return because part of your profit is getting back to you as dividend and part is getting Re-invested. Say if you invest 100 Rs on X-date and mutual funds gives 10% return in 1st year and then gives back 50% of profit made as dividend, so on 10 Rs Profit you would get 5 Rs as dividend and 5 Rs will be Re-Invested. If this process is continued for 3 years, after end of 3rd year, you would have got around 16% as dividend back and 15% profit in portfolio which when added becomes 31% that is little bit less from Growth option. 

Apart from this there is one more scheme available related to Dividends called “Dividend Re-Investment”, I personally feel that this scheme is one of the worst options available in funds. Here Mutual fund will show that 10 Rs is dividend and then Invest that 10 Rs in same fund, just like growth fund but here difference comes in case of Debt funds for taxation. In such Equity funds count of your units will increase in portfolio. One more negative with this option is that capital gain is incremental, so if funds buy new units through dividend money, the new units need to be held for next 1 year to avoid capital gain tax and such calculation can be really messy for normal investor.

There is no tax on Long Term Capital gains in Equity mutual funds , no tax on Dividends received and also no Dividend distribution tax on Equity mutual funds ( unlike in stocks where company before giving dividend to shareholders cuts dividend distribution tax and pays to government) . For Debt funds apart from no Long term gain tax, dividend distribution and dividend received tax both are there.


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