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Have you ever thought of investing in mutual funds, and if you would have thought about it, you must have enquired about it, and if you would have enquired about it, you must have come across, two names, Growth Mutual Fund Plan and Dividend Mutual Fund Plan?

Well, when you invest in mutual funds, you are offered a choice of two plan- Growth Plan and Dividend Plan. It is an investor who decides which plan is going to work for his financial goal, and which plan they should go with.

Let us understand, about these plans in mutual funds, differences between the two, and which plan will work better for your capital appreciation or your goal needs.

Growth Plan in Mutual funds

The mutual fund schemes that do not pay the profits made by the scheme in the form of dividends to its investors and perceive the idea of growth by the reinvestment of profits generated are popularly referred to as Growth Plan in Mutual Funds.

Dividend Plan in Mutual Funds 

The mutual fund schemes that distribute the gains generated by the scheme to its investors in the form of a dividend, on a monthly quarterly or yearly basis, are popularly referred to as the Dividend Plan in Mutual Funds. In the dividend plans, the profits generated by the scheme are not reinvested, instead, the part of investment left after distributing the dividend is reinvested.

The fund doesn’t guarantee the amount of dividend payment, and generally, the dividend amount is announced by the fund manager, after the scheme generates profits.

Growth Plan vs Dividend Plan

The fine line difference between growth plan and dividend payout plan is, in a growth plan, the fund does not payout anything to the investors by the way of regular payouts, and all the profits of the fund generated is reinvested in the fund, whereas in the dividend plan, dividend is paid out of profits earned and income generated, to the investors. The following illustration in the table will help you understand it. In the following table, for example, we have taken a fund scheme X, and we have compared the capital appreciated by its both plans, Growth and Dividend, after a certain period.

In the table you can see there is a difference between the capital appreciation, in both the plans, the capital appreciated by growth plan is more than 

In the table you can see there is a difference between the capital appreciation, in both the plans, the capital appreciated by growth plan is more than compared to the dividend plan.

Now the question is which is better and what to choose? So to decide which is best for you, there is a need to look at the following aspects:

How do the tax implications of a growth plan and dividend plan compare?

Before the announcement of the Union Budget 2020, the dividend received in the hands of mutual fund investors was tax-free, but after the Union Budget 2020, the dividend paid by mutual fund schemes to its investor will also be liable for the tax deduction, in the hands of the investor at his applicable income tax slab rate.

The growth plan in mutual funds is taxed as per STCG (Short-term Capital gain) and LTCG (Long-term Capital Gain). If the fund is held for 1 year or less, it is taken under STCG and is taxed at 15% and in the case if the fund is held for more than one year, it is taken under LTCG and is taxed at 10% only if the gains are above Rs.1 lakh.

For small and medium-sized investors, the annual dividends may not cross the Rs.1 lakh mark and hence the growth plan may be more efficient in tax terms. Even for larger investors, the growth plan will be relatively more efficient.

Which is better for your long-term plans? 

When this question arises, then all the advisors have the same answer and that is the growth plan. As in growth plan, your profit generated in a specific month is reinvested in the fund in the very next month, without any disturbance and thus it compounds positively with the time.

In the dividend plan, a part of your profit generated is paid out to you every month and the remaining part is reinvested, in this scenario, your invested amount is disturbed, and it compounds with time but less than growth plan. So, when it comes to the best plan to create wealth for a long-term goal, the growth plan is preferred more.

What if you are retired and looking for regular income?

At the time people retire, they look for a source from where they can get a regular income, with which they can carry their expenses, and as the dividend plan in mutual funds have the facility to provide regular incomes in the form of profit generated, people generally prefer to invest in Dividend plans of mutual funds. Well, we also know that people, after they retire, are more cautious towards risk in their investment, thus most of them focus towards liquid funds or debt funds which are less risky than equity mutual funds. The dividend option is available in these short-term and less risky funds but at the same time, they carry high DDT (Dividend Distribution Tax). In case of debt funds and liquid funds the dividend distribution tax is charged at the rate of 29.12% (25% tax + 12% surcharge + 4% cess), so probably paying this much tax, in your retirement is not good for your regular income, so what to do?

A better way would be to structure the payout in the form of a Systematic Withdrawal Plan (SWP) so that you are only taxed on the capital gains component and not on the principal component. That would work better than a dividend plan.

Conclusion

After analyzing the different aspects like tax deduction and capital appreciation for both the plans of mutual funds, Dividend and Growth, we can conclude that growth plans are more efficient from the point of view of taxation as well as from the point of view of long-term financial planning.  

So, now you can wisely choose which plan is better for your long-term investment and capital appreciation.

Most importantly, do meet a financial advisor, and get every point to point details about Growth and Dividend Plan in mutual fund schemes, also they will help you to plan your investment well according to your goals.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).