{"id":9676,"date":"2016-08-16T12:11:34","date_gmt":"2016-08-16T06:41:34","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=9676"},"modified":"2018-07-13T18:08:31","modified_gmt":"2018-07-13T12:38:31","slug":"should-you-choose-the-dividend-option-or-the-growth-option-2","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/mutual-funds\/should-you-choose-the-dividend-option-or-the-growth-option-2\/9676","title":{"rendered":"Simply Important: Should you choose the dividend option or the growth option?"},"content":{"rendered":"

\u201cShould I go for growth option or take out the dividends in my fund?\u201d – is a question frequently asked by many of you, when venturing into mutual fund investments. We have already discussed how dividends are paid out and how your NAV reacts in our last week\u2019s article “What are dividend and growth options in a mutual fund?”<\/p>\n

We also summarized what to choose. This week, we elaborate on which option to go for, based on your cash flow need.<\/p>\n

Which one to choose?<\/strong><\/p>\n

Your cash flow requirements and tax efficiency will be the two factors that will determine whether you need to go for dividend or growth option. Let us look at these within the category of equity and debt funds.<\/span><\/p>\n

Open<\/span> a FREE Account Now! <\/span><\/a><\/div>\n

Equity funds<\/strong>
\nEquity funds are meant for the long term. Your reason for choosing an equity fund must be to build wealth towards some goal which is perhaps at least few years away. \u00a0Equity funds cannot be used to generate near term income options for you.<\/p>\n

That simply means you should stay invested in an equity fund and not take the cash out (unless you will invest the dividends back diligently)to help compounding work for you.<\/p>\n

Since, long-term capital gains are free of tax, the solution here is simple: As a general principle, go for growth or dividend reinvestment in equity funds.<\/strong><\/p>\n

But there are exceptions<\/strong>: One, in case of theme funds or sector funds that you hold tactically, you may wish to either opt for dividend payouts or book profits as the fortunes of themes can take a turn after one good cycle.Two, in case of ELSS, given that your money is locked in, you may wish to go for a dividend payout if you are in say your 50s and are a bit averse to risk and want some profits in cash during the lock-in.<\/p>\n

Young investors should allow their tax saving fund to grow with growth option.<\/p>\n

Debt funds<\/strong>
\nThis category gets a bit tricky because the dividend suffers dividend distribution tax (DDT).DDT is nothing but the tax on your dividend. While it is not deducted on your dividend directly in your hands, it is reduced from your NAV.
\nGiven this tax component, dividend payout and dividend reinvestment can be tax inefficient. Let us look at whether you need to opt for it.
\n1. You need some cash flows from your debt fund<\/strong>:In this case, you can choose the dividend payout or the systematic withdrawal plan (SWP) under growth option. Look at the table below. The SWP is a clear winner for those in the 10% and 20% tax brackets. But please ensure that you do not end up paying exit load. Opt for SWP post the exit load period if you wish to avoid the load.<\/p>\n\"image<\/a>\n

<\/div>\n

Those in the 30% tax bracket, can go for dividend payout, if you intend to hold the fund for less than three years. But if you are invested for more than 3 years and redeem post that then growth option makes sense, since you will get capital gains indexation benefit. In such a case go for SWP for regular cash flows. Each such redemption will get capital gain indexation benefit if your investment is over 3 years old.<\/p>\n

Remember, switching between options will also unnecessarily entail capital gains tax if you have profits. Hence, get your investment time frame right when you start your investment.<\/p>\n

Open<\/span> a FREE Account Now! <\/span><\/a><\/div>\n
    \n
  1. You don\u2019t need cash flows from your debt fund<\/strong>:In this case, dividend payout and SWP are not needed since you have no cash flow need.
    \nYou therefore have 2 options \u2013 to go for growth or dividend reinvestment. Look at the table below – growth option scores in most cases, except when you are in the 30% tax bracket and redeem in less than 3 years.<\/li>\n<\/ol>\n

    This will be true in case of liquid funds or ultra-short-term funds that you may park for a short while. In that case you will suffer DDT of 28.33% (including surcharge and cess) on the dividend reinvested. This will be slightly lower than the income tax slab of 30.9% (including cess).<\/p>\n

    Consider your fresh investments through the above routes. But if you make your switches now,do take into account the exit load and the capital gains, (will vary for each fund) if any,you may suffer on the fund now.<\/p>\n\"image<\/a>\n

    <\/div>\n","protected":false},"excerpt":{"rendered":"

    \u201cShould I go for growth option or take out the dividends in my fund?\u201d – is a question frequently asked by many of you, when venturing into mutual fund investments. We have already discussed how dividends are paid out and how your NAV reacts in our last week\u2019s article “What are dividend and growth options […]<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[6,66,376],"tags":[],"yoast_head":"\nShould you choose the dividend option or the growth option?<\/title>\n<meta name=\"description\" content=\"Two key factors will determine whether to go for the growth option or the dividend option. 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