Are you thinking about investing in mutual funds? Before deciding on the right mutual fund plans for your portfolio, it’s crucial to determine whether you’re interested in a growth plan or a dividend plan. Many investors find choosing between these two options confusing. This article will guide you in selecting the mutual fund plan that best suits your investment strategy.
The Growth Option:
The growth option in mutual funds is considered a cumulative choice. In this setup, any profits the fund earns are not paid out to you but instead reinvested into the fund. This reinvestment harnesses the power of compounding, allowing your investment to potentially grow more significantly over time. When the fund performs well, its net asset value (NAV) increases. Conversely, if the fund incurs losses, the NAV decreases.
The Dividend Option:
With the dividend option, a fund manager takes the profits generated by the fund and distributes them to investors at regular intervals. These distributions can occur daily, monthly, quarterly, semi-annually, or annually.
Tax Considerations:
The tax treatment of the growth and dividend plans varies. Based on Budget 2020, dividends received by investors are added to their total income and taxed according to their income tax slab. In the growth plan, tax implications depend on the type of mutual fund and the duration of your investment. For equity-oriented mutual funds held for five years or more, the gains are considered long-term investments and are taxed at 10% annually on amounts exceeding Rs 1 lakh, without indexation benefits. Gains up to Rs 1 lakh per year are tax-exempt.
Choosing the Right Plan:
Deciding between a dividend or growth option depends on your personal financial needs and goals. Once you’re clear on why you’re investing in mutual funds, selecting the right mutual fund investment plan becomes straightforward. Remember not to compare the NAV of growth and dividend plans, as they naturally differ. Typically, the NAV of growth plans is higher than that of dividend plans. Happy investing!
