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Dividend, Growth Or Reinvestment Option?
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If you have ever invested in mutual funds you would have noticed, while filling out the application form that you are offered choices – dividend option or growth option.
What you opt for depends on what your goals are and whether you want an income from your investment or you are looking for capital appreciation. If you want some money, in return you can go in for the dividend option, but if you are looking for your capital to grow, then you can opt for the growth option.
Let me tell you what happens in a dividend option.
Suppose you buy a unit in a mutual fund for Rs 10/. After some time the price goes to Rs 12, that is, there is an appreciation in your investment by Rs 2. In a dividend option, the scheme will pay out that appreciated amount as dividend to investors. The value of your investment therefore remains the same, because you already have the dividend in your hands.
If you opted for the growth option, on the other hand, then there is no payout by the fund, but your capital will have appreciated. You can wait for more appreciation from the scheme and exit when you wish to.
There is a third option offered by funds. Dividend is declared and then reinvested automatically by the fund at the prevailing price. This again is another way of capital appreciation since you are not taking away the income but putting it back in the scheme.
Unless you are really hard-up for cash, I would suggest that you should ideally opt for the growth or the dividend reinvestment options. They are the best ways for wealth creation.
Another aspect you have to consider is that of taxation. Dividend from equity funds is exempt from tax in the hands of the investors. On other types of funds, the income is subject to dividend distribution tax, which the fund has to pay to the government and realises it from the investor.
Tax on capital gains (which you will get under the growth option) depends on whether you exit within a year from investment or hold it longer than a year. Short-term capital gains are taxed at 15 percent while there is zero tax on long-term capital gains.
So next time you see the choices on your application form, think carefully about it and tick the appropriate box.
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