Growth option


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There is a dividend reinvestment plan, which is not often used and hence we shall not dwell on the same. We shall look at a growth plan and a dividend payout plan.

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Essentially, the difference is quite simple. In a growth plan, the fund does not payout anything to the investors by way of regular payouts. All the profits of the fund are reinvested in the fund and therefore your wealth compounds.

NAV of scheme after dividend Rs. Past performance may or may not be sustained in the future. Growth option on the other hand, does not offer you any regular income; instead all the money that the scheme generates from its investments is simply put back into it in order to generate capital over time. So this means that you will always have the same amount of units that you purchased when you entered the scheme.

On the other hand, the dividend plan pays dividends out of profits earned and income generated. Remember, a fund is not permitted to pay dividend out of capital. The big question is how to choose between a growth plan and dividend plan.

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Firstly, let us look at what these plans are all about. Comparing a dividend plan and a growth plan The difference between a growth plan and dividend plan can be best understood with the help of an example.

In case of growth and dividend payout, number of units remains the same. However, you can always change the option later. Besides the basic returns that you may receive on your mutual fund investment; be it through growth, dividend payout or dividend reinvestment, It is important to consider the tax impact of making your choice. This is so because the tax treatment is different for long term and short term holding period. Again, the tax treatment also differs for equity funds and debt funds.

If you look at the above instance, you will see that the wealth effect is the same in case of the growth fund and the dividend fund. So, the wealth effect is the same in both the cases. Then what are the growth option to choose between a growth plan and a dividend plan? There are three points on which the choice between dividend plan and growth plan has to be made. How do the tax implications of a growth growth option and dividend plan compare?

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That is an important aspect of the choice between growth plans and dividend plans. For example, when the mutual fund pays out dividends, it is tax free in the hands of the investors. For an investment of less than 1 year, the dividend plan does appear to be more useful.

For small and medium sized investors the annual dividends may not cross the Rs.

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Even for larger investors, the growth plan will be relatively more efficient. What fits better in your long term financial plan?

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  • Dividend or Growth - What’s the best for me?

This is one area where the growth plan really scores over the dividend plan. When you opt for a dividend plan, the fund regularly pays out dividends out profits and to that extent your NAV reduces.

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But do you reinvest these dividends? More often than not, investors use the dividends for other purposes and to that extent your wealth diminishes. Growth plans on the other hand are auto compounders. Since the profits are automatically reinvested by the fund, the growth plan is more in sync with long term wealth creation.

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The power of compounding works best in case of growth plans. Also, when you make a financial plan you peg your SIPs to specific goals.

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A growth plan ensures that you can growth option returns more credibly and hence long term wealth creation becomes more predictable. In case of growth plans, it is always more in sync with financial planning.

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What if you are retired and looking for regular income? This is one case where you actually require regular income. So can such persons opt for a dividend plan?

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There is a catch here. When you are retired and looking for regular income, then your risk appetite is low and hence you prefer to invest in debt funds or liquid funds. The DDT is much higher in these cases because in case of debt funds and liquid funds the dividend distribution tax is charged at the rate of A better way would be to structure the payout in the form of a Growth option Withdrawal Plan SWP so that you are only taxed on the capital gains component and not on the principal component.

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That would work better than a dividend plan. The bottom-line is that growth plans are more efficient from the point of view of taxation as well as from the point of view of long term financial planning. The choice is quite clear!