There are lot of misconception and myths about four Mutual Funds options (Growth, Dividend Payout, Dividend Re-investment and Bonus) which add to confusion in the world of mutual funds and agents use it against investors and make them fool…
It is imperative that before you signify your choice of option, you are aware what they mean and how they function.
Under this option, you do not receive any dividends. You continue to enjoy compounded growth in value of your mutual fund scheme. The NAV keeps changing either up or down according to performance of the scheme. The growth option is best, if you do not need regular money back from your investment and looking for long term accumulation because your investment gets compounded.
Dividend Payout Option
This is the most misunderstood option in mutual fund as people think that dividend is something extra which receive other than their investments which is not true. Dividend Payout option in mutual funds means that you will be repaid some amount of your investments every year and it will be called as “dividends”, this helps those people who want some regular returns every year from their investments in mutual funds.
Dividend Re-investment Option
Under this option instead of paying dividend cheques or providing ECS credits, the dividend amount declared by a mutual fund scheme, goes in buying additional units of the same scheme (where you are invested), and you continue to book profits and keeps re-investing them in the same scheme.
Under bonus option you are not paid regular dividends. Instead you continue to receive bonus units in accordance to a ratio declared by the fund house. (Very few mutual fund houses have this option).
Which option is more beneficial?
Your returns from above all options are almost the same. But in the dividend payout you lose, on compounding returns as the dividend you receive is not re-invested either by the scheme or the investor. Unlike the dividend option, the growth option reinvests the gains over and over again and the returns are compounded, resulting in higher proceeds, at the time of maturity. Now as for as question of which is the correct option is concerned, it depends upon what your financial plan calls for. Your financial plan drawn by your planner should ideally be a function of your age, income, expenses, nearness to goals and risk appetite.
How are they taxed?
There is no long-term capital gains tax on equity-oriented mutual fund schemes. The short-term capital gains tax is 15 per cent. If you stay invested in a growth scheme for more than a year, your investment will be tax-free. For those opting for a dividend option, the dividend declared by mutual funds would be tax-free at the hands of the unit holders. Dividend distribution tax is paid by the fund house at 14 per cent.