Mutual Fund: Growth v/s. Dividend

Growth v/s. Dividend

Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to theinvestors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.

The increase in Dividend Distribution Tax will make dividend options in Debt Mutual Funds (other than liquid funds) less attractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Effective Post Tax Yield in Long Term investments (for the redemption of after a year)

Particular	Fixed Deposits	Mutual Fund
		Growth Option	Dividend
Assumed rate of return from the investment (%) p.a.	9%	9%	9%
Income tax rate	30.90%	10.3%	NA
Dividend Distribution Tax	NA	NA	28.33%
Effective post yields (lumpsum withdrawals after a year)	6.22%	8.07%	6.45%

Note: The above rates are an assumed rate of return.  The actual rate of return in a mutual fund scheme may yield higher or lesser returns depending upon the then prevailing market conditions.

Dividend Reinvestment Option is also better than Growth option in Debt Mutual Funds if the units are redeemed before 1 year.

Liquid Scheme	Reinvestment  / Payout	Growth
Investment	1,00,000	1,00,000
Total Return @ 5%	5,000	5,000
Dividend Declared @ 4%	4,000	NIL
Dividend in hands of the investors	3,117	NIL
DDT (on 3,117 @ 28.325%)	883	NIL
Capital Appreciation	1,000	5,000
STCG @ 33.99%	340	1,700

Therefore, individuals opting for the dividend option will get Rs.3,777/- (3117 + 1000 - 340) and investors who are opting for the growth option will get Rs.3,300/- (5,000 - 1,700).

Despite the increase in the DDT, Dividend plans in the Debt schemes are still attractive for investors who fall under the higher tax slab of 30%. They still give higher post-tax returns than similar products such as bank fixed deposits. In the Dividend option of debt funds, an investor has to pay the tax of 28.325% (over short term on the dividend received after payment of DDT) while in Bank Fixed deposit, he has to pay 30.9%.

Src; http://www.miraeassetmf.co.in/

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