There are quite a few options to choose from Mutual Funds because there is no one single option catering to the needs of all the investors. While choosing the Mutual Fund as an investment option, an investor can choose to make an investment in various ways. The investors have to choose either from a growth option or a dividend reinvestment option if they don’t want to take their dividend payouts.

The choice between a fund with a growth option and a fund with a dividend reinvestment option a confusing decision. Both funds have their advantages and disadvantages. Deciding which fits better will depend upon the individual’s needs and circumstances as an investor.

By choosing a growth option, the investor allows the fund company to invest his dividend payments in more securities and eventually earn more money.

By choosing dividend reinvestments, fund managers are permitted to make use of dividend payments for the purpose of buying more shares on the behalf of the investor in the fund. If you choose any of these options, you are simply giving up regular dividend payouts to use that money to grow your holdings.

If Equity Fund Is Including In Your Long-Term Financial Plan

Equity funds are preferred normally for long-term financial planning. Equity funds involve risks but they also provide higher returns and hence, have the power to convert results in immense wealth creation over a longer period of time. Make sure to choose equities as part of your overall financial plan.

Dividend plan: Regular dividend payouts will drain down money from your corpus. Any dividend payment will result in NAV. and if it’s not reinvested at a good rate of interest then the purpose of financial planning will fail. Dividend reinvestment plan: It is somewhat like the growth plan with a minor difference. Therefore, a growth equity fund will prove simpler and better for your long-term financial planning.

Growth Option On Mutual Funds

The most basic plan is the growth plan where nothing is paid out to the investor. Any dividends that perhaps paid out by the stocks in the mutual fund will not be received by the investor. This is known as the growth option. The investor by selecting the growth option allows the funding company to reinvest the money. If not so, then the investor will be paid in the form of a dividend. The Net Asset Value (NAV) of the Mutual Fund increases by this money. The Net Asset Value will reduce to the extent of the dividend paid out.

The growth option will not prove useful for an investor who intends to get regular cash payouts from his/her investments. It is an approach to maximize the NAV of the fund. After the sale of the mutual funds, it comprehends a higher capital gain on the exact number of shares he/she initially purchased. The reason being, all dividends that would have been paid out were actually used by the fund company to further invest in stocks and attract more clients. Here investor does not receive more shares instead of the value of his/her existing shares increase.

When Growth Option Is Better For You?

If you are planning long term investments in an equity fund: While making long-term investments, taxation on the returns is according to the Long-Term Capital Gain (LTCG) tax. It is tax-free up to Rs1 lakh and taxable at 10% on gain above that. Choosing for dividend reinvestment would imply DDT, therefore, the growth option is favorable as it falls in low tax slabs i.e., 10% and 20%: The Investors who fall in lower tax income slab i.e., 10%-20%, for them it makes no sense to opt for dividend reinvestment and pay 28.84%.

Short-term investment in debt funds and lower tax slab: Investing in debt funds for the short term can attract income tax on the returns. The growth option is better for lower tax slab investors as they have to pay only a 10%-20% tax based on their tax slab.

Dividend Reinvestment Option On Mutual Funds

The dividend reinvestment plan can be explained as a hybrid plan that has the features of both the growth plan and the dividend plan. This option of mutual funds is quite different from the growth option. In this option, the dividends in the fund that would otherwise be paid out to investors are used to buy more shares in the fund. Similarity being, dividends are not paid in cash. Instead, the fund company uses the cash to buy more shares on behalf of the investor and then transfer them to the account of the investor.

This option increases the number of shares owned eventually. If dividends are not reinvested the growth of the account may not be higher. But this option boosts the chances of account growth. This service is provided by many investment companies free of cost to it’s shareholders. The realization of capital gain is much higher in this option because the shareholders will always end up with more shares than they started with.

When Dividend Reinvestment Is Good For You?

Opting for short-term investment in liquid funds: Choosing dividend reinvestment is a better choice while investing liquid funds for a short tenure. And also when your dividends are being paid regularly (daily or weekly).

Being a part of the higher tax slab: When you fall under this category, dividend reinvestment is a better choice.

Short term investment in debt-funds and falling in 30% tax slab: Investing in debt funds for the short term can attract income tax on returns. If you fall under the higher tax slab then the dividend reinvestment option is better for you as you only have to pay 28.8% on dividends instead of paying 30% tax based on your tax slab.

Dividend Distribution Option

In the majority of the cases, the shareholders have a choice for their dividends to be paid out or to be reinvested.

Dividend Payouts

In this scenario, the Mutual Fund made dividend distributions are directly paid out to the shareholders. If this option is chosen by the shareholder, then dividends are swept directly into a cash account, transferred into the bank account electronically or sent out by check. In dividend reinvestment option cases, usually shareholders do not incur any fees for having their dividends paid in cash.

Choosing either to pay out or reinvest the dividends does not affect the tax implications of those dividends. You need to carefully opt for your Mutual Fund plan as per your unique liquidity needs and your tax status. Typically for long-term investments, the growth plan offers the best alternative.

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