Growth vs dividend plan: which is better for investment in mutual funds?

Are you looking to invest in mutual funds? Well, before you go on selecting the right mutual funds investment plans for your portfolio, it is important to understand which option do you plan to choose? Growth plan or dividend plan? Several investors are often confused between these two investment plans. In this article, we will help you understand which mutual fund investment plan is a better fit for your investment portfolio.

What is growth option?

Growth investment option in mutual funds is often perceived as a cumulative option. Under the growth investment option, the profits realized on a scheme are not returned to the investor. Instead, the returns are re-invested in this scheme that allows for the power of compounding to work its magic. As a result, whenever the mutual fund investment plan makes a profit, the NAV of the fund or the net asset value of the fund automatically arises. On the other hand, during scenarios when the scheme makes a loss, the NAV of the fund takes a hit as well and thus decreases.

What is dividend option?

Under the dividend investment option in mutual fund schemes, a fund manager books the profits on schemes and further distributes it to the investors. These profits are distributed at certain intervals such as daily, monthly, quarterly, semi-annually, or annually.

Tax aspect of growth and dividend plan

The tax implications for both the growth investment plan and the dividend investment plan differ in nature. As per Budget 2020, dividends distributed to investors are added to the overall income of an investor and taxed according to an individual’s income tax slab. This is referred to as the classic way of taxing dividends, wherein the dividends are taxed in the hands of the investors.

Under the growth plan, the tax implications on mutual fund schemes are dependent on the type of mutual fund and the investment horizon of the scheme. For instance, if you invest in equity-oriented mutual fund schemes for a period of 5 years, gains made on this investment would be termed as a long-term investment. These gains are taxed at 10% per annum over Rs 1 lac without the benefit of indexation. Gains up to Rs 1 lac per annum are exempt from any type of tax.

Which plan is better suited for you? Growth or dividend?

Whether you choose the dividend option, or the growth option entirely depends on your personal needs and goals. Once you get clarity about why you need to invest in mutual funds, the next steps, choosing the right mutual fund investment plan, growth plan, and mode of investment is quite breezy. Note that you do not do the mistake of comparing NAV of growth plans and dividend plans as they tend to differ in nature. In fact, it is often found that the NAV of the growth plan is usually higher than that of dividend plan. Happy investing!

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