Mutual Fund : Growth or Dividend ?

elssWhen it comes to choosing between options such as growth, dividend and bonus, two factors should decide your choice. One, your own risk profile and liquidity requirements. If you would prefer the returns earned by your equity funds to be paid out to you regularly, go for the dividend payout option. This will ensure that part of the gains on your investments is encashed and distributed to you.

However, do bear in mind that over the long term, your returns from the Dividend option may lag those from the Growth option, as the latter retains the gains made and reinvests them (you may have observed that the NAV under growth option is higher). It is nothing but an `accumulate` strategy.

Two, tax treatment. While returns that are distributed by equity funds as dividend are tax-free in your hands, returns that flow to you as `gains` on the NAV are subject to capital gains tax. Capital gains will be taxed at 10 per cent, if you sell equity fund units within a year. They are exempt from tax if you sell units anytime after a year. If you plan to hold your equity funds for several years, therefore, it would not matter whether you opt for Dividends or Growth (this regime however, may change in future).

Growth and dividend options

Bonus options are usually offered only by debt mutual funds, as a tax saving device. Dividends distributed by debt funds are usually subject to a dividend distribution tax at the fund`s end. To avoid this tax, some debt funds offer a `bonus` option to investors. Under this option, your gains will be credited to your account as additional units and not as cash, which is the case with dividend payouts. Do note that Growth, Dividend and Bonus options are just different means by which funds distribute their gains to investors. A `bonus` or `dividend` comes out of the fund`s portfolio gains (NAV) and does not add to your overall returns.

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